Article | Journal of Finance | August 2000

Corporate Reorganizations and Non-Cash Auctions

by Matthew Rhodes-Kropf and S. Viswanathan

Abstract

This paper extends the theory of non-cash auctions by considering the revenue and efficiency of using different securities. Research on bankruptcy and privatization suggests using non-cash auctions to increase cash-constrained bidder participation. We examine this proposal and demonstrate that securities may lead to higher revenue. However, bidders pool unless bids include debt, which results in possible repossession by the seller. This suggests all-equity outcomes are unlikely and explains the high debt of reorganized firms. Securities also inefficiently determine bidders' incentive contracts and the firm's capital structure. Therefore, we recommend a new cash auction for an incentive contract.

Keywords: Auctions; Revenue; Debt Securities; Insolvency and Bankruptcy; Privatization; Capital Structure; Bids and Bidding; Motivation and Incentives; Performance Efficiency; Contracts;

Citation:

Rhodes-Kropf, Matthew, and S. Viswanathan. "Corporate Reorganizations and Non-Cash Auctions." Journal of Finance 55, no. 4 (August 2000): 1807–1849.