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Effects of seller’s information disclosure in equity auctions requiring post-auction investment

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  • Sogo, Takeharu

Abstract

We consider a moral hazard issue inherent in the equity auctions of assets such as oil and gas leases and corporate takeovers. After the auction, the winning bidder decides whether to make follow-up investments in the acquired asset and makes the equity payment out of the revenue from it according to the auction outcome. Before the auction, the seller holds private information about the possible returns on that investment and must decide whether to disclose it. Larger equity payments undermine incentives to invest, reducing the impact of information revealed by the seller on expected values of the asset to a winning bidder. Thus, information disclosure makes bids less aggressive in expectation. Expected seller revenues may be higher when she does not disclose her private information than when she commits to publicly announcing it regardless of whether it is good or bad.

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  • Sogo, Takeharu, 2017. "Effects of seller’s information disclosure in equity auctions requiring post-auction investment," International Journal of Industrial Organization, Elsevier, vol. 55(C), pages 166-181.
    • Handle: RePEc:eee:indorg:v:55:y:2017:i:c:p:166-181
    DOI: 10.1016/j.ijindorg.2017.09.005
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    References listed on IDEAS

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    1. Bergemann, Dirk & Pesendorfer, Martin, 2007. "Information structures in optimal auctions," Journal of Economic Theory, Elsevier, vol. 137(1), pages 580-609, November.
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    Cited by:

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    3. Jyh-Bang Jou & Charlene Tan Lee, 2023. "Design of the contingent royalty rate as related to the type of investment," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-25, December.

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    More about this item

    Keywords

    Information disclosure; Equity auctions; Post-auction investment; Moral hazard;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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