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

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.