Sanjai Bhagat

Corporate research & development investments international comparisons

Abstract This paper explores the determinants of corporate R&D for U.S., Canadian, British, European, and Japanese firms. We find last years debt ratio is significantly negatively correlated with current R&D expenditures for U.S. firms, and positively for Japanese firms. Second, we document a significant positive relation between two-year lagged stock return and current R&D expenditures for U.S., European, Japanese, and large-size British firms. Finally, we find a significant positive relation between last years tax payments and current R&D expenditures for Japanese firms, and a significant negative relation for medium-size and small-size U.S. firms.

The impact of long-range managerial compensation plans on shareholder wealth

Abstract This study examines the stock price reaction around the announcement of proposed changes in long-term managerial compensation packages. The evidence indicates that on average these plans are met with positive market reactions, i.e., shareholder wealth increases. Further, we are unable to differentiate the market reaction to various types of long-range compensation schemes. This result is consistent with the notion that firms with different characteristics will resolve their managerial compensation requirements differently. Thus no particular compensation package necessarily dominates all others.

Do Tender Offers Create Value? New Methods and Evidence

We develop the Probability Scaling Method, which rescales short-window announcement period returns; and the Intervention Method, which uses returns associated with intervening events, to estimate value improvements from tender offers. These methods address biases in conventional techniques, which measure only a fraction of the total tender offer gain; and which include revelation about bidder stand-alone value. Perceived value improvements are much larger than traditional methods indicate, so that we cannot reject the hypothesis that bidders on average pay fair prices for targets. Furthermore, our new methods affect inferences about economic forces in the takeover market. We identify several effects (higher combined bidder-target stock returns for hostile offers, lower for equity offers, and lower for diversifying offers) that reflect differences in revelation about stand-alone value, not gains from combination.

The Shareholder Wealth Implications of Corporate Lawsuits

Large revisions in dividends are accompanied by stock price reactions for industry rivals of the announcing firm. Though these effects are near-zero on average, their magnitude differs systematically across the firms in the industry. Rivals that are unlikely to be affected by competitive realignments within the industry tend to experience stock price effects like those of the announcing firm. Those that are likely to be affected tend to experience statistically insignificant reactions of the opposite sign. Thus, for some rivals, competitive effects apparently offset contagion effects. We find supporting results for changes in rivals dividends over a longer period. We examine the intra-industry information effects of announcements of dividend initiations. Our results indicate that the stock prices of industry competitors do not react to dividend initiations. Further, analysts do not revise their earnings forecasts for nonannouncing, rival firms. These findings are not sensitive to the manner in which we estimate abnormal returns or calculate forecast revisions. Thus, the information conveyed to the market by the decision to initiate dividends contains no industry-wide component. Dividend initiation appears to be a firm-specific event.

The costs of inefficient bargaining and financial distress *1: Evidence from corporate lawsuits

Abstract This study provides the first large-sample analysis of the stock-market reactions to interfirm litigation. When a suit is filed, the common stock of the typical defendant declines by about 1%, while the plaintiff experiences no significant gains. For the average pair of firms, the combined drop in value upon filing is

Issuing costs to existing shareholders in competitive and negotiated underwritten public utility equity offerings

21 million. Much of the loss is regained if the suit is settled. The findings suggest that bargaining among firm claimants sometimes leads to very inefficient outcomes. Part of the leakage is explained by the costs of increased financial distress imposed on the defendant.

Event Studies and the Law - Part I: Technique and Corporate Litigation

Abstract This paper presents the results of an empirical investigation of whether there is any difference in the cost incurred by public utilities if they issue new equity through a negotiated or competitive underwriting. We conclude that the expected cost of a competitive offer is less than the expected cost of a negotiated offer, but that the variance of the cost is substantially greater with a competitive offer. These results are interesting because most public utilities use negotiated underwriting unless forced by regulation to use competitive offers. This paper is also an addition to the growing agency theory literature.

Voting power in the proxy process : The case of antitakeover charter amendments

Event studies are among the most successful uses of econometrics in policy analysis. By providing an anchor for measuring the impact of events on investor wealth, the methodology offers a fruitful means for evaluating the welfare implications of private and government actions. This paper is the first in a set of two papers that review the use and impact of the event study methodology in the legal domain. This paper begins by briefly reviewing the event study methodology and its strengths and limitations for policy analysis. It then reviews in detail how event studies have been used to evaluate the wealth effects of corporate litigation: Defendants experience economically-meaningful and statistically-significant wealth losses upon the filing of the suit, whereas plaintiff firms experience no significant wealth effects upon filing a lawsuit. Also, there is a significant wealth increase for defendant firms when they settle a suit with another firm, in contrast to other types of plaintiffs, and in contrast to the settling plaintiff firms. These findings suggest that, at a minimum, lawsuits are not a value-enhancing way for corporations to settle their disagreements with other corporations. In addition, the market appears to impose a higher sanction on firms than actual criminal sanctions, and reputational losses are of equal magnitude for civil fines as criminal ones. The paper concludes with some recommendations for researchers: The standards for conducting an event study are well established. Researchers can increase the power of an event study by increasing the sample size, and by narrowing the public announcement period to as short a time-frame as possible. The companion paper reviews the use of event studies in corporate law and regulation.

INCENTIVE EFFECTS OF STOCK PURCHASE PLANS

Abstract The likelihood that a firm will enact a management-sponsored antitakeover charter amendment depends on ownership structure. This implies that the adoption of antitakeover amendments may be anticipated. Then announcement returns provide a biased estimate of wealth effects. An estimator that corrects for the bias induced by anticipation indicates that the enactment of an antitakeover amendment is associated with a statistically significant decrease in shareholder wealth. The voting power of employee stock ownership plans and the chief executive officer plays a prominent role in determining whether a firm will adopt this type of takeover defense.

Director Ownership, Governance and Performance

Abstract Financial economists are interested in whether alternative compensation plans are adopted primarily for tax, incentive or signaling reasons. As most compensation plans have tax implications, examining for other effects is difficult. In this paper we examine the stock market reaction to employee stock purchase plans which are ‘non-tax advantageous’ and adopted for incentive/signaling reasons. The results suggest that (1) equity-based compensation schemes have a positive effect on shareholder wealth for reasons other than tax reduction, (2) a motive for adopting these plans is to align managerial and shareholder interests, and (3) equity ownership motivates key executives more than subordinate employees.