Ch. 3: Auctions in Corporate Finance 137
4.11. Advanced econometrics of auction data
There has been considerable progress in the application of econometric techniques to
auction data. While the datasets used in these studies do not cover corporate finance
directly, the techniques used should be of interest to corporate finance researchers, as
they may be applicable to financial datasets and help resolve certain key issues. One
broad topic that has been covered in empirical auction studies and that also appears
in corporate finance are auctions with one informed bidder and numerous uninformed
bidders. In corporate finance, such a situation could reasonably be assumed when cur-
rent management is allowed to bid for a corporation, either in a takeover or bankruptcy
context. Certainly in bankruptcy one concern has been that management, if allowed to
bid in an auction, may be able to purchase the corporate assets at less than fair value.
Hendricks and Porter (1988, 1992)have studied U.S. government oil lease auctions of
so-called “drainage” tracts—tracts that have a neighboring tract currently under lease to
one of the bidders. For these drainage tracts, it is reasonable to assume that the owner of
the neighboring tract would have better information than other bidders. The authors of
several studies have found this assumption, and the related equilibrium bidding theory,
to be consistent with the data. The econometrics used relies heavily on the underlying
auction theory. For example, equilibrium with one informed bidder imposes restrictions
on the distributions of the informed bidder’s bid distribution and the uninformed bid-
ders’ bid distributions. Note that a test of this type requires that data on all bids be
available.
Structural models are also being used successfully to examine auction data. The most
exciting approach here is to use equilibrium theory in conjunction with data on all bids
to estimate the underlying probability distribution of the valuations of bidders. The
essence of the idea here is that an equilibrium bid function maps a valuation to a bid.
If data on bids are available, then with suitable econometrics one can recover the dis-
tribution of the underlying valuations from the bid data.Li, Perrigne and Vuong (2002)
provide a step-by-step guide to structural estimation of the affiliated private value auc-
tion model. One aim of this work in the economics literature has been to estimate the
optimal selling mechanism for a real auction. For example, if valuations are affiliated,
then revenue equivalence no longer holds. Also, the optimal reserve price depends upon
the underlying distribution of values, so if that distribution can be estimated, we can also
get an estimate of the optimal reserve price. Researchers in empirical corporate finance
should be aware of the progress made in structural estimation of auctions, for some of
the issues at the heart of finance auctions may be resolved through structural estimation
(and in some finance auctions, there should be data on all bids). For example, in the
bankruptcy area, questions of reserve prices and informational rents abound, and these
are two issues that structural estimation can get at.^46
(^46) In the context of takeover auctions,Betton and Eckbo (2000)pursue an interesting line of empirical re-
search. A takeover contest typically associated with an “event tree” beginning with the initial bid, possibly