RAGHAVENDRA RAU
Investment Banks
Financial Analysts
Mutual Fund Managers
Investment Bank Market Share, Contingent Fee Payments, and the Performance of Acquiring Firms
This paper was also part of my thesis. Here I investigated the determinants of the market share of investment banks acting as advisors in mergers and tender offers. In both mergers and tender offers, bank market share is positively related to the contingent fee payments charged by the bank and to the percentage of deals completed in the past by the bank. It is unrelated to the performance of the acquirors advised by the bank in the past. In tender offers, the post-acquisition performance of the acquiror is negatively related to the contingent fee payments charged by the bank, suggesting that the contingent fee structure in tender offers ensures that investment banks focus on completing the deal. It was published in the Journal of Financial Economics in 2000.
I have a bunch of papers on analyst behavior.
The impact of all-star analyst job changes on their coverage choices and investment banking deal flow
Using a sample of all-star analysts who switch investment banks, we examined (1) whether analyst behavior is influenced by investment banking relationships and (2) whether analyst behavior affects investment banking deal flow (debt and equity underwriting and corporate control transactions).
Although the stock coverage decision is dependent on the investment banking relationship with the client firms, we find no evidence that analysts change their optimism or recommendation levels when joining a new firm. Investment banking deal flow is related to analyst reputation only for equity underwriting transactions. For debt underwriting and M&A transactions, after controlling for bank reputation, analyst reputation does not matter. There is no evidence that issuing optimistic earnings forecasts or recommendations affects investment banking deal flow. The paper was published in the Journal of Financial Economics in 2007. It is downloadable here.
Is there life after the complete loss of analyst coverage?
This paper examines the value of sell-side analysts to covered firms by documenting the effects on firm performance and investor interest after a complete loss of analyst coverage for periods of at least one year. We find that analyst coverage adds value to a firm both because it reduces information asymmetries about the firm’s future performance and because it maintains investor recognition for that firm’s stock. After the introduction of regulations that curtailed the informational advantage of analysts in the early 2000s, the investor recognition role of analysts remains important. Firms that lose all analyst coverage continue to suffer a significant deterioration in bid-ask spreads, trading volumes, and institutional presence but do not show a significant difference in subsequent performance relative to covered peers. Our results provide insight into the reasons why firms place so much importance on analyst coverage. The paper was published in the Accounting Review in 2013. It is downloadable here.
Independents' day? Analyst behavior surrounding the Global Settlement
n this paper, we examine the impact of NASD Rule 2711, NYSE Rule 472, and the Global Research Settlement on the recommendation performance of independent, affiliated, and unaffiliated analysts. We find that analysts from all three types of institutions issued fewer strong buys following these regulations designed to separate investment banking and equity research. Affiliated analysts were less likely to issue innovative recommendations. While downgrades became more prevalent following the regulations, they were significantly less informative. Independent research firms set up after the Global Research Settlement are of inferior quality; they issue more optimistic and less innovative recommendations that generate lower announcement period returns than independent firms existing prior to the Settlement. Our overall findings question whether investors will be better served via the shift in equity research to analysts at independent research firms. The paper was published in the Annals of Finance in 2011. It is downloadable here.
I have a bunch of papers on hedge fund and mutual fund manager behavior - I examine whether they are superior managers and the way they charge fees for (lack of?) performance.
Good stewards, cheap talkers, or family men? The impact of mutual fund closures on fund managers, flows, fees, and performance
In this paper, we examined a sample of equity mutual funds that closed to new investment. We find that funds close following a period of superior performance and abnormal fund inflows. Fund managers raise their fees when they close to compensate managers for losses in income due to the restrictions in size imposed by the fund closure decision. Managers reopen when fund size declines. However, they do not earn superior returns after re-opening, suggesting that the fund closure decision does not provide information about superior fund managers. The paper was published in the Review of Financial Studies in 2007. It is downloadable here.
Size doesn’t matter: Diseconomies of scale in the mutual fund industry revisited
Prior papers have found mixed evidence that fund size is negatively related to performance. One reason for the lack of consensus may be that the fund size and performance relation is endogenous. In this paper, we identify a set of instrumental variables that influence fund size but are unrelated to expected fund performance. Using this specification, we show that fund size does not appear to affect fund performance. The paper was published in the Journal of Banking and Finance in 2018. It is downloadable here.
Detecting superior mutual fund managers: Evidence from copycats
In this paper, we whether mutual fund managers could to identify other superior mutual fund managers among their rivals. Identifying actual copycat funds via comparisons of trading in consecutive periods, we find little evidence to suggest that managers are able to detect superior funds. Copycats select funds with high prior performance and investment inflows, and the performance of the target fund reverses following copying initiation. If superior managers exist, our results suggest that the source of skill lies in private information obtained by these managers. These results are consistent with information models indicating that private, but not public, information can be profitable. The paper was published in the Review of Asset Pricing Studies in 2014. It is downloadable here.
Do hedge fund managers dynamically manage systematic risk?
We find evidence of time varying allocation of hedge fund management effort across the business cycle. In weak market states, skilled managers focus on minimization of systematic risk via dynamic reallocations across asset classes at the cost of fund alpha and foregoing market timing opportunities. As markets strengthen, attention shifts to asset selection within consistent asset classes. The superior performance of low systematic risk funds previously documented arises due to the superior asset selection ability of managers that jointly possess systematic risk management skill. The paper was published in the Journal of Banking and Finance in 2016. It is downloadable here.