A New Order of Financing Investments: Evidence from Acquisitions by India's Listed Firms

Posted: 29 Jun 2018 Last revised: 26 Jun 2019

See all articles by Varun Jindal

Varun Jindal

Indian Institute of Management (IIMB), Bangalore

Rama Seth

Copenhagen Business School

Date Written: February 8, 2019

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.

Keywords: Business groups, Corporate control, Financial constraints, Investment financing, Mergers and acquisitions

JEL Classification: G32, G34

Suggested Citation

Jindal, Varun and Seth, Rama, A New Order of Financing Investments: Evidence from Acquisitions by India's Listed Firms (February 8, 2019). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3204949 or http://dx.doi.org/10.2139/ssrn.3204949

Varun Jindal (Contact Author)

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Rama Seth

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+45 3815 3815 (Phone)

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