Abstract
This article studies competitive bidding by strategic investors to buy enterprises that are being privatized through sealed-bid auctions. The bidders use a real options approach to enterprise valuation that accounts for asset quality given their private information. It is shown that the optimal bidding strategy under first-price sealed-bid auctions defines a Bayesian Nash equilibrium in which each strategic investor bids only a fraction of its prior valuation and competition decreases the bidder's profit margin. The greater the transparency and information disclosure on asset quality, the higher the seller's expected receipts will be.
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