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A new order of financing investments: Evidence from acquisitions by India’s listed firms

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  • Jindal, Varun
  • Seth, Rama

Abstract

We propose a new order of financing investments based on the considerations of control and financial constraints in a market with the presence of business groups. We base our analysis on a sample of acquisitions, one of the largest forms of investments, made by India's publicly listed firms from 1997 through 2016. We test the relative propensity of group-affiliated firms, as well as that of standalone (non-affiliated) firms, to finance their investments with stock on the one hand, and either cash or debt on the other. We find that group-affiliated bidders have the greatest propensity to finance their investments with stock when taking over firms affiliated with the same business group (within-group acquisitions), followed by standalone firms making acquisitions (standalone acquisitions). Finally, group-affiliated bidders acquiring either standalone firms or firms not affiliated with their group (outside-group acquisitions) have the lowest propensity to finance their investments with stock. The evidence of higher stock-financing of within-group acquisitions is robust to alternative explanations of tunneling and propping up in business groups.

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  • Jindal, Varun & Seth, Rama, 2019. "A new order of financing investments: Evidence from acquisitions by India’s listed firms," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 307-328.
    • Handle: RePEc:eee:corfin:v:58:y:2019:i:c:p:307-328
    DOI: 10.1016/j.jcorpfin.2019.04.007
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    More about this item

    Keywords

    Business groups; Corporate control; Financial constraints; Investment financing; Mergers and acquisitions;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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