Automatic bankruptcy auctions and fire-sales, working paper

We test for fire-sales in automatic bankruptcy auctions. Fire-sale discounts exist when the auction leads to piecemeal liquidation, but not when the bankrupt firm is acquired as a going concern. Neither industry-wide distress nor the industry affiliation of the buyer affect prices in going-concern sales. Bids are often structured as leveraged buyouts, which relaxes liquidity constraints and reduces bidder underinvestment incentives in the presence of debt overhang. Prices in ”prepack ” auctions (pre-filing private workouts) are on average lower than for in-auction going-concern sales, suggesting that prepacks may help preempt excessive liquidation when the auction is expected to be illiquid. Prepack targets have a greater industry-adjusted probability of refiling for bankruptcy, indicating that liquidation preemption is a risky strategy. “We agree with Easterbrook (1990) that the policy of automatic auctions for the assets of distressed firms, without the possibility of Chapter 11 protection, is not theoretically sound ” (Shleifer and Vishny, 1992, 1344).