Handbook of Corporate Finance Empirical Corporate Finance Volume 1

Chapter 3

AUCTIONS IN CORPORATE FINANCE*

SUDIPTO DASGUPTA
Department of Finance, Hong Kong University of Science and Technology, Clear Water Bay,
Kowloon, Hong Kong
e-mail:[email protected]

ROBERT G. HANSEN
Tuck School of Business, Dartmouth College, Hanover, NH 03755, USA
e-mail:[email protected]

Contents

Abstract 88
Keywords 88

1. Introduction 89


2. The most basic theory: Independent private values 90
   2.1. Initial assumptions 90
   2.2. First-price sealed-bid auctions 91
   2.3. Open and second-price sealed-bid auctions 94
   2.4. Revenue equivalence 96
   2.5. Reserve prices 97
   2.6. Optimal selling mechanisms 99
   2.7. Interpreting the optimal auction: The marginal revenue view 102


3. Common-value auctions 103
   3.1. Common value assumptions 103
   3.2. Optimal bidding with a common value 104
   3.3. Milgrom and Weber’s (1982a, 1982b) generalized model 104
   3.3.1. Core assumptions 104
   3.3.2. Equilibrium bidding 105
   3.3.3. Revenue ranking and the linkage principle 107
   3.4. Limitations of the common-value and general symmetric auctions 108


4. Applications of auction theory to corporate finance 109
   4.1. Introduction 109
   4.2. Applications to the market for corporate control 109

*We thank Parimal K. Bag, Espen Eckbo and Mike Fishman for comments and suggestions.

Handbook of Corporate Finance, Volume 1
Edited by B. Espen Eckbo
Copyright©2007 Elsevier B.V. All rights reserved
DOI: 10.1016/S1873-1503(06)01003-8