RAGHAVENDRA RAU
Mergers and Acquisitions
Share repurchases
Expropriation
Corporate Event Waves
CEO Pay
Corporate Governance
Firm financing
Glamour, Value and the Post-Acquisition Performance of Acquiring Firms
This paper was part of my thesis. At the time, there were a number of criticisms of standard long-horizon event study. In this paper, I used a bootstrapping methodology to show that bidders in mergers underperform while bidders in tender offers overperform in the three years after the acquisition. However, the long-term underperformance of acquiring firms in mergers is predominantly caused by the poor post-acquisition performance of low book-to-market "glamour" firms. I interpreted this finding as evidence that both the market and the management overextrapolate the bidder's past performance (as reflected in the bidder's book-to-market ratio) when they assess the desirability of an acquisition. The paper won the FMA Best Paper in Corporate Finance and the Best of the Best Award in 1996 and was published in the Journal of Financial Economics in 1998. It is the most heavily cited of all my papers.
Regulation, Taxes, and Share Repurchases in the U.K.
In this paper, I investigated whether the abnormal returns earned by firms repurchasing their own shares in the U.S. translates to the UK environment. Surprisingly, it does not, mainly because of the peculiarities of the UK tax code. The paper was published in the Journal of Business in 2002.
I have a bunch of papers on expropriation (basically, managers diverting shareholder wealth into their own pockets).
Tunneling, propping, and expropriation: Evidence from connected party transactions in Hong Kong
In this paper, we examine "connected transactions" between Hong Kong listed companies and their controlling shareholders. We try to find out what types of connected transactions are likely to lead to expropriation of minority shareholders. Which firms are more likely to expropriate? Does the market anticipate the expropriation? The paper was published in the Journal of Financial Economics in 2006. It is downloadable here.
The helping hand or the grabbing hand? Central vs. local government shareholders in publicly listed firms in China
In this paper, we analyzed related party transactions between Chinese publicly listed firms and their state-owned enterprise (SOEs) shareholders to examine whether companies benefit or lose from the presence of government shareholders and politically connected directors appointed by the government. We find that minority shareholders seem to be expropriated in firms controlled by local government SOEs. In contrast, firms controlled by the central government are benefited in their related party transactions with their central government SOEs. The paper was published in the Review of Finance in 2010. It is downloadable here.
Buy high, sell low: How listed firms price asset transfers in related party transactions
In this paper, we examined a sample of related party and arms' length acquisitions and sales of assets in Hong Kong. Our analysis shows that publicly listed firms enter deals with related parties at unfavorable prices compared to similar arms' length deals. Firms acquire assets from related parties by paying a higher price compared to similar arms' length deals. In contrast, when they sell assets to related parties, they receive a lower price than in similar arms' length deals. The paper was published in the Journal of Banking and Finance in 2009. It is downloadable here.
Tunneling and propping up: An analysis of related party transactions by Chinese listed companies
In this paper, we examined a sample of related party transactions between Chinese publicly listed firms and their controlling shareholders. Minority shareholders in these firms seem to be subject to expropriation through tunneling but also gain from propping up. On balance, there is more tunneling than propping. The paper was published in the Pacific-Basin Finance Journal in 2009. It is downloadable here.
What determines the return to bribery? Evidence from corruption cases worldwide
We analyze a hand-collected sample of bribery cases from around the world to describe how the payment of bribes affects shareholder value. Our estimates indicate that a $1 increase in the size of the bribe is associated with an $8-11 increase in the value of the firm. Proxies for information disclosure appear significant in explaining the benefits that firms receive, with more disclosure associated with lower benefits. However, this result is driven by democratic countries. Information disclosure is not significant in autocratic countries. Firms paying bribes in democratic countries do not appear to receive larger benefits relative to the bribes they pay. This paper was published in Management Science in 2020 and is downloadable here.
Patterns in the timing of corporate event waves
Corporate events happen in waves. In this paper, we examine the timing patterns of five different types of corporate event waves (new stock and seasoned equity issues, stock and cash-financed acquisitions, and stock repurchases) using a comprehensive dataset of more than 151,000 corporate transactions over the 25-year period 1980-2004. We document a distinctive pattern, previously undocumented in the literature, in the way stock-related waves form. Corporate waves seem to start with new issue waves (SEO preceding IPO waves), followed by stock-financed merger waves, followed in turn by repurchase waves. Our results hold over separate decades and across industries. Our results seem consistent with both the neoclassical efficiency hypothesis and the misvaluation hypothesis, and there are distinct periods when one or the other appears dominant. The paper was published in the Journal of Financial and Quantitative Analysis in 2011. It is downloadable here.
I also have a bunch of papers on CEO pay.
How do ex ante severance pay contracts fit into optimal executive incentive schemes?
We analyze a sample of over 3,600 ex ante explicit severance pay agreements in place at 808 firms and show that firms set ex ante explicit severance pay agreements as one component in managing the optimal level of equity incentives. Younger executives are more likely to receive explicit contracts and better terms. Firms with high distress risk, high takeover probability and high return volatility are significantly more likely to enter into new or revised severance contracts. Finally, ex post payouts to managers are largely determined by the ex ante contract terms. The paper was published in the Journal of Accounting Research in 2013. It is downloadable here.
Do compensation consultants enable higher CEO pay? A disclosure rule change as a separating device
We investigate the impact of a firm’s compensation consultant choice on executive compensation by examining shifts in consultant choice following a 2009 US Securities Exchange Commission requirement that firms disclose fees paid to compensation consultants for both consulting and other services. We show that the disclosure rule change acted as a separating device distinguishing firms likely to have used compensation consultants to extract rents from shareholders from firms that were likely to have used consultants to optimally set pay. We conclude that not all multiservice consultants are conflicted while not all specialist consultants are guardians of shareholder value. Our study provides a more nuanced view of the association between compensation consultant choices and executive pay. The paper won the Best Paper in Corporate Finance at the FMA in 2015 and was published in Management Science in 2018. It is downloadable here.
Performance for Pay? The Relation Between CEO Incentive Compensation and Future Stock Price Performance
Measures of Chief Executive Officer (CEO) excess compensation are negatively related to future firm returns and operating performance. The effect is stronger for more overconfident CEOs at firms with weaker corporate governance. Overconfident CEOs receiving high excess pay undertake activities such as overinvestment and value-destroying mergers and acquisitions that lead to shareholder wealth losses. The paper is still a working paper but has been heavily downloaded on SSRN. It is downloadable here.
An Ill Wind? Terrorist Attacks and CEO Compensation
Using multiple measures of attack proximity, we show that CEOs employed at firms located near terrorist attacks earn an 8.8% terrorist compensation premium relative to CEOs at firms located far from attacks. CEOs at terrorist attack-proximate firms prefer cash-based compensation (e.g., salary and bonus) over equity-based compensation (e.g., options and stocks granted). The effect is not driven by endogeneity, it is causal and it is larger when the bargaining power of the CEO is higher relative to that of the firm. The paper was published in the Journal of Financial Economics in 2020 and is downloadable here.
Do board interlocks increase innovation? Evidence from a corporate governance reform in India
In this paper, we examined the effect of board interlocks on patenting and R&D spending for publicly traded companies in India. We exploit a corporate governance reform to address the endogeneity of board interlocks through exogenous changes mandated by the reform requiring a subset of firms to adjust their board structure. We find that board interlocks have significant positive effects on both R&D and patenting. The impact on R&D appears induced by information transmission through interlocks. The effect on patenting is driven by firms extending patent protection by patenting inventions abroad that they have already patented in India. The paper was published in the Journal of Banking and Finance in 2017. It is downloadable here.
Why are shareholders not paid to give up their voting privileges? Unique evidence from Italy
Dual-class share unifications have typically been argued to be beneficial for voting shareholders. In the unification, voting shareholders are usually compensated for the loss of their superior voting privilege. However, no covenants exist that make this compensation mandatory for voting shareholders. In this paper, we examined a subset of dual class share unifications from Italy where, in the main, voting shareholders are not offered any compensation for the loss of their superior voting rights. We present a simple model describing the conditions under which the controlling voting shareholder will choose not to offer compensation to minority voting shareholders as part of a share unification. The paper was published in the Journal of Corporate Finance in 2011. It is downloadable here.
Why do firms go public through debt instead of equity?
We analyze a sample of private firms that go public through an initial public debt offering (IPDO) as an alternative to going public through equity (IPO). Firms that choose the IPDO route are larger, more likely to be backed by a financial sponsor such as a venture capital or private equity firm, and less likely to face information asymmetry than traditional IPO firms. Only a quarter of these firms eventually conduct an IPO, but those who do face lower underpricing than their contemporaneous private peers who do not have public debt at the time of going public. The paper was published in the Critical Finance Review in 2018. It is downloadable here.