Bankruptcy Auctions That Work
In a recent lead article of the Journal of Financial Economics, entitled "Bankruptcy Auctions: Costs, Debt Recovery, and Firm Survival," Professor Karin Thorburn provided evidence on bankruptcy auctions that work. Thorburn, who teaches finance at Tuck and is associate director of the Center for Corporate Governance, finds that auctions that implement hard constraints on management and that adhere strictly to debt priority rules are relatively cheap and efficient. Her empirical laboratory was bankruptcy auctions in Sweden, where incumbent management automatically loses its position upon filing. The firm is immediately put up for sale in an open auction organized by an independent, court-appointed trustee. All bids must be in cash, and creditors are paid off strictly according to priority. These auctions typically produce several positive outcomes: the auctions are completed quickly, in about two months, and with lower direct costs than the typical Chapter 11 case; three-quarters of the bankrupt firms are sold as going concerns; and those auctioned firms that do continue to do business perform at par with their nonbankrupt industry peers over the five-year period after the auction. Professor Thorburn's evidence raises an important question: Why not systematically auction off firms filing for Chapter 11 in the U.S.?
This article appeared in Tuck Today, 30(2), Summer 2001, published by the Office of Publications at Tuck.