Question

In Sweden, firms that fail to meet their debt obligations are immediately auctioned off to the highest bidder. (There is no reorganization through Chapter 11 bankruptcy.) The current managers are often the high bidders for the company. (Hint: Assume these auctions are common-value auctions.) Suppose for a particular auction, the current managers have placed a bid of $3 million. True or False: To avoid the winner's curse, your bid should be larger than $3 million. True False

Answer 1

Based on the information about the debt obligations, to avoid the winner's curse, your bid should not be larger than $3 million. Therefore, it's false.

What are debt obligations?

It should be noted that debt obligations simply means the debt securities that are issued by companies in regards to money borrowed.

The firms that fail to meet their debt obligations are immediately auctioned off to the highest bidder in Sweden. In such a case, the current managers are often the high bidders for the company.

In such situations, to avoid the winner's curse, your bid should not be larger than $3 million. This is because it's the approximate intrinsic value.

In conclusion, based on the information about the debt obligations, her correct option is false.

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