138 S. Dasgupta and R.G. Hansen
- Conclusion
Upon reflection, the accomplishments of auction theory are really quite amazing. The
“black box” of the Walrasian auctioneer has been opened, studied in depth, and its
perfection questioned. We can now say a lot about the process of actual price for-
mation in many real markets. While modelers have been able to explore theoretically
important topics such as revenue comparisons across auctions, their work has also en-
abled economists to consult with governments on the design of optimal auctions to
sell public assets. And with only a slight time lag, empirical work in auctions is fol-
lowing in the footsteps of theory, with structural estimation methods setting a new
standard for creativity and rigor. Similar to the way that theoretical developments
made their way into the real world of auction design, empirical work is focusing on
real world auctions such as those found on Ebay and other online auctions. There
are not too many topics in economics that allow researchers to cover such a broad
swath of analytical territory, from the highly theoretical to the highly empirical and
practical. In this way, auction theory resembles developments in financial asset pric-
ing, where for instance the development of the option pricing model led to a surge in
theoretical and empirical work while at the same time the model was applied in real
markets.
The application of auction theory in corporate finance really needs to be seen as
the intersection of two fields, that of auction theory and of information-based corpo-
rate finance theory. Nobody should have been surprised to see auction theory have
a bit of a field day in being applied to topics in corporate finance, and as we think
this survey shows, this is clearly what has happened and continues to happen. The
question before us, however, must be: what have we learned in the process? That
there has been considerable learning cannot be doubted, with the most significant
learning being in interpreting the returns to bidders and targets in the market for cor-
porate control, and in understanding the real institutional practices used in financial
markets, such as underpricing in the IPO market, non-cash bids in takeover markets,
and the role of asymmetries and discrimination against selected bidders. Perhaps the
single best measure of auction theory’s influence in corporate finance is that most
PhD courses in corporate finance will include several papers, if not an entire mod-
ule, on applications of auctions. As even a superficial study of auctions requires
a fair amount of knowledge of game theory, the inclusion of auctions in PhD fi-
nance courses reinforces the study of games, itself a critical component of modern
finance.
followed by the appearance of rival bidders, until the eventual success or failure of the initial bid. The market
reaction to a bid (or indeed, at reaching any node) therefore represents the sum of the product of the proba-
bilities of all subsequent events in the tree emanating from that node, and the associated payoffs. Since the
probabilities and market reactions can be estimated, the payoff implications associated with the events (the
“market prices”) can be estimated.Betton and Eckbo (2000)find generally significant effects for the target,
but less significant effects for the bidders.