Acquisitions in Bankruptcy : 363 Sales Versus Plan Sales and the Existence of Fire Sales

The acquisition of bankrupt firms has increasingly taken place through section 363 of the U.S. Bankruptcy Code. Some scholars are critical of 363 sales because the process weakens creditors' voting rights, takes place quickly, and has limited information disclosure compared with sales that take place in conjunction with a bankruptcy plan, i.e., “plan sales.” These factors potentially result in less active bidding and increased fire sales. Supporters of 363 sales contend that financial markets are sufficiently developed to accommodate such sales efficiently. Ours is the first study of which we are aware that compares 363 sales and plan sales to test these contentions empirically. Using a sample of large firms acquired in bankruptcy from 1996 to 2010, we find that 363 sales are associated with considerably lower sale prices. Further examination shows that the lower sale prices for 363 sales compared with plan sales are not due to the quick speed with which they take place, which could potentially result in less active bidding or greater information problems. Rather, the lower prices for 363 sales are associated with the reduced negotiating leverage that creditors experience in 363 sales as postulated by Elizabeth Rose in her 2006 study. We do not find systematic evidence of poor governance or restricted bidder participation in 363 sales, and while sale prices are negatively impacted by industry distress, the industry distress discount is not further exacerbated by 363 sales. Our results contribute to the understanding of bankruptcy fire sales and also have policy implications related to bankruptcy law