Ramesh P. Rao

Do Spin-Offs Expropriate Wealth from Bondholders?

A wealth transfer from bondholders to stockholders is one of several hypotheses used to explain stockholder gains on the announcement of a spin-off. However, previous empirical research has not found systematic evidence supporting the wealth expropriation hypothesis. Using a larger sample with comprehensive bond data, we find evidence consistent with wealth expropriation. Bondholders, on average, suffer a significant negative abnormal return during the month of the spin-off announcement. However, even accounting for the loss to the bondholders, the aggregate value of the publicly traded debt and equity increases on a spin-off announcement, suggesting that the wealth expropriation hypothesis is not a complete explanation of the stockholder gains. In explaining the magnitude of the losses to bondholders, we find they are a function of the loss in collateral in the spun-off subsidiary and the level of financial risk of the parent firm. Consistent with a loss to bondholders, firms are more likely to have their credit rating downgraded than upgraded after a spin-off. Additionally, consistent with the wealth transfer hypothesis, losses to bondholders tend to be more severe, the larger the gains to shareholders.

Determinants of board composition in New Zealand: a simultaneous equations approach

Abstract This paper models the composition of New Zealand boards of directors as a function of alternative corporate governance mechanisms, other control variables, and legislation designed to improve corporate monitoring. We find evidence that board composition and firm performance jointly impact each other in a positive manner. We document that the proportion of outsiders on the board is positively related to board size and is negatively related to future growth, nonlinearly related to inside ownership, and is not related to debt and ownership concentration. Firm performance is inversely related to firm size, positively impacted by future growth, and appears to be nonlinearly related to insider ownership. Passage of the new Companies Act in 1994 is associated with increased representation of outside board members. However, this increase is not associated with enhanced firm performance which may be a consequence of increased liability placed on directors.

Board Composition in New Zealand: An Agency Perspective

This paper looks at board composition determinants in New Zealand. We document that the proportion of outside board members is inversely related to insider equity ownership supporting the notion that these variables are substitute mechanisms in controlling agency problems. We also find that board composition is directly related to debt, ownership concentration, and profitability and inversely related to growth and firm size. There is evidence that firms with influential CEOs have lower outside board representation. Finally, we document that the passage of the legislation reforming company and securities laws in 1993 was associated with increased outside members on the board. Copyright Blackwell Publishers Ltd 2002.

Evidence on factors affecting the relationship between CEO stock option compensation and earnings management

Purpose - The purpose of this paper is to examine the factors affecting the relationships between CEO stock option compensation and earnings management.

Substitutes for Voting Rights: Evidence From Dual Class Recapitalizations

We offer additional insights regarding the motivation for dual class recapitalizations and their potential impact on managerial entrenchment. We test the general hypothesis that the loss of shareholder monitoring associated with dual class recapitalizations is replaced by alternative monitoring mechanisms. Evidence is found supporting an increase in the use of outside directors and an increase in the use of debt leverage in response to these recapitalizations. Evidence of increased monitoring by financial analysts and institutional investors also is reported, although the casual link to dual class recapitalization transactions is less clear.

Labor Unions as Shareholder Activists: Champions or Detractors?

This paper examines the impact of labor union shareholder activism through the submission of shareholder proposals during 1988-2002. We examine the effect of labor union sponsored shareholder proposals on announcement period returns, on the corporate governance environment of the firm including shareholder rights, board composition, and CEO compensation, and on long run shareholder wealth. We find that the efficacy of activism is related to union presence at targeted firms and shareholder support for proposals. Our findings, hitherto not reported elsewhere, contribute to the shareholder activism literature by implying that labor unions may be unique in their ability to spur such changes relative to other shareholder proponents.

Do Credit Ratings Really Affect Capital Structure

This paper revisits recent investigations into the role credit ratings play in the marginal financing behavior of firms. While it has long been documented that credit ratings may be an important determinant of firm capital structure policy, academics have only recently subjected this motivation to empirical scrutiny. We add to the brief existing literature by investigating the sensitivity of marginal financing behavior of firms to a number of attributes deemed to capture firms’ affinity to emphasize credit ratings in their financing behavior. Our results suggest that credit ratings are not a first order concern in capital structure decisions.

Dividend yields and stock returns: Evidence from the Tokyo Stock Exchange

This study examines the Tokyo Stock Exchange (TSE) and documents that it is characterized by a significant dividend yield effect similar to that found in U.S. markets. The study also confirms the existence of a significant size and seasonal anomaly in the TSE as documented in prior literature. The dividend yield effect is found to be significant in January, March, June, and December but not in the other months. The significance of the dividend yield effect is found to hold even after controlling for the size effect. The tax rationale as an explanation for the dividend yield effect does not appear to be valid for the Japanese stock market. The fact that these anomalies behave in a fashion similar to that observed in the United States is suggestive of either an integrated global capital market or the omission of common elements in the pricing process used or both.

Sarbanes-Oxley Act and Corporate Credit Spreads

Stock market reaction suggests that despite improved disclosure and increased accountability, Sarbanes-Oxley Act (SOX) is too costly and not beneficial. Noting that bondholders are likely to reap the many potential benefits of SOX without bearing the brunt of costs, we examine how SOX affected corporate credit spreads to better assess its benefits. SOX has led to a significant structural decline in spreads of at least 27 basis points. Riskier firms (low rating, long maturity, high leverage, and small size) and firms closely related to SOX major provisions (earning variability, managerial trading, and corporate governance) experience greater declines in spreads.

Bank mergers, equity risk incentives, and CEO stock options

Purpose - The purpose of this paper is to examine the risk-incentive effect of CEO stock options in the banking industry. Design/methodology/approach - For a sample of industrial mergers, Williams and Rao find that the risk-incentive effect of CEO stock options is associated with higher post-merger risk. This result indicates that stock options may be effective in mitigating the agency problem of Jensen and Meckling wherein managers take too little risk on behalf of shareholders. The authors extend the method of Williams and Rao to the banking industry. In particular, they are interested in determining whether the same relationship holds for these highly regulated and leveraged firms. Findings - Using a sample of 131 bank mergers that took place between 1993 and 2002, the authors determine that the risk-incentive effect of CEO stock options is positively related to the post-merger level of equity risk. The results of this study also show that the interaction of size and the risk-incentive effect is negatively related to volatility following the merger, which agrees with the original study. Originality/value - This paper extends the literature by examining an industry that is largely ignored because of its highly regulated nature.