Kartik Raman

Value creation in corporate asset sales: The role of managerial performance and lender monitoring

Abstract Examining stockholder and bondholder wealth of acquirers and sellers, we find that asset sales are firm value enhancing for the seller but value neutral for the acquirer. Although divestitures are typically viewed as more synergistic and friendly transactions than takeovers, we find using a matched acquirer–seller sample, that the net wealth effect from the transaction is not significantly different from zero. However, those transactions that involve high- q bidders and low- q sellers create maximum value for acquirers and for the transaction as a whole. Further, low- q bidder/low- q seller transactions are value destroying. We find that seller gains are only related to the seller’s managerial performance. We document that private lender monitoring enhances transactional value in corporate divestitures. Collectively, the analysis shows that well-managed and highly monitored firms are more likely to benefit from asset sale transactions.

Convertible Bond Calls: Resolution of the Information Content Puzzle

This study resolves the puzzling evidence on convertible bonds by documenting that conversion-forcing calls are indeed bad news. Supporting the long-term implications of Harris and Raviv (1985), we document that the common stocks of calling firms substantially underperform their benchmarks by a median of 64% over the five-year post-call period. In contrast, firms that choose not to call their in-the-money convertibles exhibit no long-run abnormal performance. We show that studies drawing conclusions based on short-term price reversal immediately following the call fail to completely capture the valuation effect that occurs over a longer time horizon. We document that the market condition at the time of the call (issuance volume) and cash flow benefits related to the call (relation between dividend and after tax coupon payment) influence the post-call stock price performance. Our analysis also reveals that the post-call underperformance of high-growth firms is more pronounced than that of low-growth firms, indicating greater market exuberance associated with high-growth firms at the time of the call.

Why are Stock Splits Declining

The proportion of U.S. companies undertaking stock splits drops from 23% in 1982 to less than 1% in 2009. This trend is partly attributable to changes in firm and market characteristics, including improvements in stock liquidity, and, declines in profitability, dividend-paying propensity, and investor demand for low priced stocks. However, regardless of characteristics, firms exhibit a lower propensity to split. We similarly find a time-series decline in the size of split factors. Overall, given the costs associated with splits, the decline in stock split activity appears to be a rational response by firms to changes in market dynamics.

Industry Structure and Corporate Debt Maturity

We examine how industry competition affects firms’ choice of short-term debt. We find that the percentage of short-term debt is positively related to industry concentration at low levels of concentration, and inversely related to industry concentration at higher levels of concentration. This nonlinear relation is stronger in industries where firms are either more homogeneous or compete more aggressively. Moreover, we find that firms with shorter-maturity debt are less aggressive than their rivals in the product market. The overall evidence suggests that although financial contracts alleviate agency problems, they exacerbate the risk of predation.

Supply Chain Characteristics and Bank Lending Decisions

This paper investigates whether borrowers’ supply chain relationships affect banks’ lending decisions. These relationships benefit firms by reducing the information gap with banks, which increases the access to capital, while reducing the cost of the loan. However, banks demand increased intensity of covenants and greater use of collateral when the correlation of cash flows among firms in the supply chain is high. Longer relationships between the borrower and its supply chain partner, and between the bank and the borrower’s supply chain partner, mitigate lending constraints. The evidence suggests supply chains serve as an informational bridge between lenders and borrowers.