The Effect of Leverage on Bidding Behavior: Theory and Evidence from the FCC Auctions

This is an exploration of how bidding behavior of firms in various auctions is affected by their capital structure. The theoretical model considers a first-price sealed bid and an English auction. We find that as debt levels increase, firms tend to reduce their bids. The lower bids give the competition incentives to reduce their bids as well. These results are investigated empirically using data from the 1994-1995 FCC spectrum auctions. Consistent with the theoretical model, higher debt levels of the bidding firm and of the competition tend to lead to lower bids. Additional determinants of bidding behavior in these auctions are also analyzed.