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Corporate Reorganizations and Non-Cash Auctions

Matthew Rhodes-Kropf and S. Viswanathan
The Journal of Finance
Vol. 55, No. 4, Papers and Proceedings of the Sixtieth Annual Meeting of the American Finance Association, Boston, Massachusetts, January 7-9, 2000 (Aug., 2000), pp. 1807-1849
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/222381
Page Count: 43
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Corporate Reorganizations and Non-Cash Auctions
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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.

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