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Corporate control and the choice of investment financing: the case of corporate acquisitions in India

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Abstract

The market for corporate control offers a rich framework to study the interaction between investment and financing decisions. Do corporations have specific preferences for the means of financing acquisitions, such using cash or equity to pay the claims of the target firm’s shareholders? This study builds a unique sample of 1041 corporate acquisitions over the period 2000–2018 in India, a major emerging economy with fast-growing capital markets. The study investigates separately corporate preferences for the means of payment and the financing sources for acquisitions, using multinomial logit and nested logit models. First, we find that different factors explain the payment and financing decisions. Second, the cash payment decision is best explained by the target’s relative size, greater tender offers, cross-border deals, and cash reserves. Third, the findings are most aligned with pecking order theory and cost of capital considerations.

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Code availability

Codes available upon request for purposes of replication.

Data Availability

Data are available with permission of the data provider.

Notes

  1. External Commercial Borrowing (ECB) includes foreign loans (term loans, buyers’ credit, etc.) made available by approved foreign lenders, with minimum average maturity stipulations. In our empirical setting, Foreign Currency Convertible Bonds (FCCBs) are convertible debentures issued by an Indian company expressed in foreign currency. A non-convertible debenture (NCD) is a debt instrument with a fixed tenure that requires payment at a fixed rate of interest periodically (on a monthly, quarterly, semi-annually or annual basis) and repayment of the principal amount at the end of the tenure.

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Acknowledgements

The authors acknowledge support from a ICSSR Grant. They also thank Mr. Akshay Patwar, S&P Capital IQ, for assistance with the data.

Funding

The authors thank the Indian Council of Social Science Research (ICSSR).

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Authors and Affiliations

  1. Department of Finance and Insurance, FSA Business School, Laval University, Quebec City, QC, G1V 0A6, Canada

    Gabriel J. Power

  2. Indian Institute of Management Shillong, Shillong, Meghalaya, India

    Neelam Rani

  3. Birmingham Business School, University of Birmingham, Birmingham, UK

    Anandadeep Mandal

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  1. Gabriel J. Power
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  2. Neelam Rani
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  3. Anandadeep Mandal
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The three authors contributed to analysis and writing.

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Correspondence to Gabriel J. Power.

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Power, G.J., Rani, N. & Mandal, A. Corporate control and the choice of investment financing: the case of corporate acquisitions in India. Rev Quant Finan Acc 58, 41–68 (2022). https://doi.org/10.1007/s11156-021-00987-0

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