The Winner's Curse and Bidder Competition in Acquisitions: Evidence from Failed Bank Auctions




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    • Edwin L. Cox School of Business, Southern Methodist University and Department of Finance, San Diego State University, respectively. We would like to thank Chel Murphy, Debby Overby, and Manisha Varaiya for excellent research assistance. This paper has benefited from presentations at the Federal Reserve Bank of Dallas, Southern Methodist University, and the Emory University-Federal Reserve Bank of Atlanta Workshop on Money, Banking and Finance. We would like to thank René Stulz, the editor, and an anonymous referee for helpful comments. We are responsible for remaining errors. Research grants were provided by the Research and Development Council and the Center for the Study of Financial Institutions and Markets at the Edwin L. Cox School of Business, Southern Methodist University.


This study examines the effect of bidder competition in acquisitions. We use predictions from auction theory to test whether acquirers of failed banks overpay (the “winner's curse”) when bidding in FDIC sealed-bid purchase and assumption (P&A) transactions (auctions). The empirical results indicate that winning bids tend to increase as the number of competitors increases, as predicted by theory. We also find that bid levels of all bidders increase with increased competition, which is consistent with bidders' failing to adjust for the winner's curse in a common value auction setting. However, additional tests using winning bids only are consistent with both a common value and a private values model, so this result should be interpreted with caution.