Robert Holthausen

Robert W. Holthausen is the Nomura Securities Company Professor of Accounting and Finance. Prior to coming to Wharton, he was a Professor of Accounting and Finance at the Graduate School of Business of the University of Chicago. He earned his doctorate at the University of Rochester where he also earned his M.B.A. Prior to his academic career, he was a C.P.A. working at Price Waterhouse and he was also in the finance group at Mobil.

Professor Holthausen is widely published in both finance and accounting journals. His research has studied the effects of management compensation and governance structures on firm performance, the effects of information on volume and prices, corporate restructuring and valuation, the effects of large block sales on common stock prices, and numerous other topics. His research has appeared in such journals as the Journal of Accounting and Economics, The Accounting Review, the Journal of Accounting Research, the Journal of Finance and the Journal of Financial Economics. He has served in various editorial capacities for all five journals listed above; either as consulting editor, associate editor, editorial board member or reviewer. He is currently an editor of the Journal of Accounting and Economics.

His teaching has been concentrated in the areas of investment management and valuation. Currently, his primary teaching responsibility is for the valuation class he developed. He has teaching experience at the undergraduate, M.B.A., and Ph.D. levels and has won teaching awards from both the undergraduate and M.B.A. students at Wharton, including the David J. Hauck award. He is currently the academic director of Wharton’s Mergers and Acquisitions program.

Professor Holthausen has consulted with a variety of companies. His specific consulting engagements are varied and include such diverse activities as serving as a compensation consultant to a Fortune 500 Company, consulting with an investment company in the development of fundamental trading rules used to manage equity portfolios and performing valuation analysis in a variety of situations.

Robert W. Holthausen and Mark E. Zmijewski, Corporate Valuation: Theory, Evidence and Practice (2014)

Robert W. Holthausen and Mark E. Zmijewski (2012), Pitfalls in Levering and Unlevering Beta and Cost of Capital Estimates in DCF Valuations, Journal of Applied Corporate Finance, 24, pp. 6074.

Abstract: The “levering” and “unlevering” of estimates of beta and various costs of capital are routine steps in estimating the discount rates used in DCF valuations. But as the authors demonstrate by reviewing the existing research on the subject, the levering and unlevering formulas that are most commonly used in practice are not appropriate for valuing many companies. They also illustrate the shortcomings of—and substantial valuation errors that can result from—the common practices of assuming that the betas of securities like debt and preferred stock are equal to zero and ignoring the effects of equitylinked securities such as employee stock options, warrants, and convertible debt. The authors offer alternative levering formulas that are more appropriate for valuing most companies than—and as readily implemented as—the formulas commonly used today. They also provide a relatively easy way to estimate betas for debt and preferred stock that can be used in the levering and unlevering formulas. The authors discuss how properly to account for equitylinked securities such as employee stock options, warrants, and convertible debt while demonstrating the potential importance of ignoring such equitylinked securities in the levering and unlevering formulas. Finally, the authors show why it is appropriate to standardize the treatment of contractual obligations such as leases across comparable companies in order to get consistent estimates of the unlevered cost of capital.  

Robert W. Holthausen and Mark E. Zmijewski (2012), Valuation with Market Multiples: How to Avoid Pitfalls When Identifying and Using Comparable Companies, Journal of Applied Corporate Finance, 24, pp. 2638.

Abstract: An important part of the market multiple valuation process is selecting companies for comparison that are really comparable to the company being valued. The goal of assessing comparability is to align the relevant value drivers—especially risk and growth—of the comparable companies with those of the company being valued. In this paper, the authors examine the relevant value drivers for commonly used market multiples such as EBIT and EBITDA. They show that, in addition to risk and growth, analysts doing market multiple valuations need to take account of differences in variables such as cost structure, working capital, and capital expenditure requirements when assessing comparability. The authors also show that the degree to which different value drivers are important for assessing the comparability of companies differs across commonly used market multiples. In other words, some multiples are more sensitive than others to changes in certain value drivers. For example, when using a multiple like EBITDA in which certain expenditures (such as capital investments, working capital investments, and some expenses) are not deducted in the calculation of the denominator, assessing comparability based on such expenditures is more important than when using a multiple like free cash flow that deducts that expenditure in calculating the denominator. Or to cite another example, since EBIT and EBITDA make no attempt to reflect income taxes, using income tax cost structures to assess comparability is more important for enterprise value multiples based on these measures than for enterprise value multiples based on “aftertax” measures of income such as unlevered earnings or free cash flow. In addition, not all multiples control for differences in cost structure, such as cost of goods sold or SG&A. If a multiple is affected by differences in those value drivers, the comparable companies must be similar to the company being valued on that dimension. Finally, the authors show that differences in capital expenditure and working capital requirements can also have large effects on certain multiples; and as a result, such value drivers also must be considered when assessing comparability.  

Robert W. Holthausen (2009), Accounting Standards, Financial Reporting Outcomes and Enforcement, Journal of Accounting Research, Vol. 47, No. 2 (May), pp. 447458.

Abstract: In this article the author draws parallels between the source material on the effects of law on the economic development of countries and on the effects of accounting standards on financial reporting outcomes. The main argument is that these materials are complementary in regard to what they reveal about understanding the effects of law, regulations, and accounting standards on economic and financial reporting outcomes. The material also suggests that U.S. securities laws and reporting standards have adopted a more regulatory direction over time. Attention is also given to the effects of the adoption of International Financial Reporting Standards (IFRS) globally.

Robert W. Holthausen (2003), Testing the Relative Power of Accounting Standards versus Incentives and Other Institutional Features to Influence the Outcome of Financial Reporting in an International Setting, Journal of Accounting and Economics, Vol. 36. No. 13 (December), pp. 271283.

Abstract: Ball Robin and Wu (2003) investigate the relationship between accounting standards and the structure of other institutions on the attributes of the financial reporting system. They find evidence consistent with the hypothesis that beyond accounting standards, the structure of other institutions, such as incentives of preparers and auditors, enforcement mechanisms and ownership structure affects the outcome of the financial reporting system. However, interpretation of the evidence with respect to the notion of quality of the financial reporting system and the quality of accounting standards that the authors introduce is problematic.

Robert W. Holthausen and Ross Watts (2001), The Relevance of the Value Relevance Literature for Financial Accounting Standard Setting, Journal of Accounting and Economics, Vol 31. No. 1 –3 (September), pp. 376.

Abstract: We evaluate the literature that, for standardsetting purposes, assesses the usefulness of accounting numbers on their stock market value association. For several reasons we conclude the literature provides little insight for standard setting. First, the association criterion has no theory of accounting or standard setting supporting it. Standard setters' descriptions of their objectives and accounting practice are both inconsistent with the criterion. Important forces shaping accounting standards and practice are ignored. Second, many tests in the literature rely on valuation models that omit important factors and many studies do not provide links between valuation model inputs and accounting numbers. Finally, there are a variety of significant econometric issues in the studies.

John Core, Robert W. Holthausen, David F. Larcker (1999), Corporate governance, chief executive officer compensation, and firm performance, Journal of Financial Economics, Vol 51. No.3 (March), pp. 371406.

Abstract: We find that measures of board and ownership structure explain a significant amount of crosssectional variation in CEO compensation, after controlling for standard economic determinants of pay. Moreover, the signs of the coefficients on the board and ownership structure variables suggest that CEOs earn greater compensation when governance structures are less effective. We also find that the predicted component of compensation arising from these characteristics of board and ownership structure has a statistically significant negative relation with subsequent firm operating and stock return performance. Overall, our results suggest that firms with weaker governance structures have greater agency problems; that CEOs at firms with greater agency problems receive greater compensation; and that firms with greater agency problems perform worse.

Robert W. Holthausen and David F. Larcker (1997), Performance, Leverage and Ownership Structure in Reverse LBOs, Journal of Applied Corporate Finance, Vol 10. No.1 (Spring), pp. 820.

Abstract: Previous studies have provided convincing evidence of improvements in the performance of companies that undergo leveraged buyouts (LBOs). This article presents evidence from the authors' recent study of the performance of 90 “reverse LBOs–LBO firms that go public again in an IPO—after they return to public ownership. The aim of the study was to track the performance of reverse LBOs and to reveal any association between operating performance and changes in leverage and equity ownership. Among the principal findings of the study were the following: Despite a substantial decline in leverage ratios and equity ownership by insiders at the time of the IPOs, equity ownership of reverse LBOs remained more concentrated and leverage higher than that of public companies in the same industries. The operating performance of reverse LBOs was significantly better than that of the median firm in their industries in the year prior to and in the year of the IPO. Although there is some evidence of a deterioration in the performance of the reverseLBO firms, they continue to outperform their industry competitors for at least four full fiscal years after the IPO. Greater reductions in the percentage equity owned by managers and other insiders at the time of the reverse LBO are associated with larger declines in operating performance. The stock price performance of reverse LBOs after going public appears more “rational” than that of other IPOs—that is, there is less initial under pricing and no sign of the negative, longerterm abnormal returns reported by recent studies of IPOs.

Robert W. Holthausen and David F. Larcker (1996), The financial performance of reverse leveraged buyouts, Journal of Financial Economics, Vol 42. No. 3 (November), pp. 293332.

Abstract: We examine the accounting and market performance of reverse leveraged buyouts (i.e., firms making their first public offering after previously completing a leveraged buyout). On average, the accounting performance of these firms is significantly better than their industries at the time of the initial public offering (IPO) and for at least the following four years, though there is some evidence of a decline in performance. Crosssectional variation in accounting performance subsequent to the IPO is related to changes in the equity ownership of both operating management and other insiders, and is unrelated to changes in leverage. Finally, there is no evidence of abnormal common stock performance after the reverse leveraged buyout.

Robert W. Holthausen, David F. Larcker, Richard Sloan (1995), Business unit innovation and the structure of executive compensation, Journal of Accounting and Economics, Vol 19. Nos. 2&3 (MarchMay), pp. 279314.

Abstract: We examine whether the structure of compensation for the divisional CEO is related to subsequent innovative activity within the division, and whether the divisional CEO's compensation is structured as a function of the expected innovation opportunity set facing the division. Both the expected innovation opportunity set and the divisional executive's compensation contract are treated as endogenous variables by adopting a simultaneous equation approach. We find modest evidence that the proportion of total compensation tied to longterm components has a positive relation with future innovation, but no evidence that this proportion has a positive relation with the expected innovation opportunity set.

Past Courses

ACCT921 EMPIRICAL RES IN ACCT I

The course covers empirical research design and provides students with a perspective on historically important accounting research. Topics covered such as research on the timeseries and crosssectional properties of financial accounting measures, capital markets behavior, financial intermediaries, and international accounting research.

ACCT922 EMPIRICAL RES IN ACCT II

The course covers empirical research design and provides students perspective on historically important accounting research. Topics covered such as research on the timeseries and crosssectional properties of financial accounting measures, capital markets behavior, financial intermediaries, and international accounting research. Topics covered may include corporate governance, executive compensation, debt contracting, accounting regulation, tax, and management accounting.

FNCE207 CORPORATE VALUATION

The focus of this course is on the valuation of companies. The course covers current conceptual and theoretical valuation frameworks and translates those frameworks into practical approaches for valuing companies. The relevant accounting topics and the appropriate finance theory are integrated to show how to implement the valuation frameworks discussed on a stepbystep basis. The course teaches how to develop the required information for valuing companies from financial statements and other information sources in a realworld setting. Topics covered in depth include discounted cash flow techniques and price multiples. In addition, the course covers other valuation techniques such as leveraged buyout analysis.

FNCE728 CORPORATE VALUATION

The focus of this course is on the valuation of companies. The course covers current conceptual and theoretical valuation frameworks and translates those frameworks into practical approaches for valuing companies. The relevant accounting topics and the appropriate finance theory are integrated to show how to implement the valuation frameworks discussed on a stepbystep basis. The course teaches how to develop the required information for valuing companies from financial statements and other information sources in a realworld setting. Topics covered in depth include discounted cash flow techniques and price multiples. In addition, the course covers other valuation techniques such as leveraged buyout analysis.

FNCE899 INDEPENDENT STUDY

Independent Study Projects require extensive independent work and a considerable amount of writing. ISP in Finance are intended to give students the opportunity to study a particular topic in Finance in greater depth than is covered in the curriculum. The application for ISP's should outline a plan of study that requires at least as much work as a typical course in the Finance Department that meets twice a week. At a minimum, we need a description of the methodology you intend to employ, a bibliography and description of the data that you will use as well as a list of interim deliverables and dates to ensure that you complete the project within the semester. Applications for FNCE 899 ISP's will not be accepted after the THIRD WEEK OF THE SEMESTER. You must submit your Finance ISP request using the Finance Department's ISP form located at https://fnce.wharton.upenn.edu under the Course ISP section

• Wharton Undergraduate Excellence in Teaching Award, 2007
• Wharton Undergraduate Excellence in Teaching Award, 2004
• Wharton Graduate Association Excellence in Teaching Award, 2003
• Welling Professorship, George Washington University, 1998
• Wharton Undergraduate Excellence in Teaching Award, 1995
• Wharton Undergraduate Excellence in Teaching Award, 1992
• David J. Hauck Undergraduate Teaching Award, 1992
• Wharton Graduate Association Excellence in Teaching Award, 1990
• Wharton Undergraduate Excellence in Teaching Award, 1990
• Wharton Undergraduate Excellence in Teaching Award, 1989
• Peat, Marwick, Mitchell and Co. Grant, 1982
• Managerial Economics Research Center Grant, University of Rochester, 1979
• Richard D. Irwin Foundation Fellow, 1978
• Arthur Andersen & Co. Doctoral Dissertation Grant, 1978
• Dean’s Honor List, University of Rochester, 1976
• University Fellowship at the University of Rochester, 1975
• Beta Gamma Sigma, University of Rochester, 1971
• University Fellowship at the University of Rochester, 1969

U.S. Businesses Doing More M&A Deals But Making Same Mistakes, Forbes 10/06/2015

Knowledge @ Wharton

• Joseph Perella and Peter Weinberg: Secrets to a Successful Partnership, Knowledge @ Wharton 12/19/2012
• Bound for the Beach? Bring These Books…, Knowledge @ Wharton 06/26/2012
• DotCom Bubble, Part II? Why It’s So Hard to Value Social Networking Sites, Knowledge @ Wharton 10/04/2006
• Can AIG Stay on Top?, Knowledge @ Wharton 06/01/2005
• Why Do So Many Mergers Fail?, Knowledge @ Wharton 03/30/2005
• Has SarbanesOxley Made a Dent in Corporate America’s Armor?, Knowledge @ Wharton 10/20/2004
• AT&T Wireless: Will Cingular’s Big Bet Pay Off?, Knowledge @ Wharton 03/10/2004
• M&A Activity: Back with a Whimper, Knowledge @ Wharton 12/17/2003
• Board Members Facing Public Scrutiny Should Bone Up on Finance, Accounting, Knowledge @ Wharton 06/18/2003
• Is Andersen’s Number Up?, Knowledge @ Wharton 03/13/2002
• Will Mergers & Acquisitions Take Off in Europe?, Knowledge @ Wharton 02/27/2002
• Has DaimlerChrysler Hit the Breakdown Lane or Just Stopped to Fill Up?, Knowledge @ Wharton 12/20/2000