Optimal Equity Auctions with Heterogeneous Bidders (Please Do Not Distribute Externally)

This paper investigates the design and performance of equity auctions— auctions in which bidders pay with equities instead of cash. Such equity auctions arise in many economic situations including mergers and acquisitions, venture capital financing, and oil and gas lease auctions. Among all incentivecompatible mechanisms of equity auctions, I identify the mechanism that maximizes the seller’s expected revenue. I study how bidder heterogeneity affects the optimal design, and obtain the distinct implications of different sources of the heterogeneity. I show it is optimal for the seller to have smaller bidders win more often, because bidders’ informational advantages decrease in their sizes—and hence the seller can extract a larger proportion of rents from smaller bidders.