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The Winner's Curse and Bidder Competition in Acquisitions: Evidence from Failed Bank Auctions
Author(s) -
GILIBERTO S. MICHAEL,
VARAIYA NIKHIL P.
Publication year - 1989
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1989.tb02404.x
Subject(s) - winner's curse , common value auction , curse , bidding , competition (biology) , competitor analysis , bid shading , english auction , microeconomics , economics , value (mathematics) , auction theory , unique bid auction , computer science , ecology , management , machine learning , sociology , anthropology , biology
This study examines the effect of bidder competition in acquisitions. We use predictions from auction theory to test whether acquirers of failed banks overpay (the “winner's curse”) when bidding in FDIC sealed‐bid purchase and assumption (P&A) transactions (auctions). The empirical results indicate that winning bids tend to increase as the number of competitors increases, as predicted by theory. We also find that bid levels of all bidders increase with increased competition, which is consistent with bidders' failing to adjust for the winner's curse in a common value auction setting. However, additional tests using winning bids only are consistent with both a common value and a private values model, so this result should be interpreted with caution.