Bond Market Access and Corporate Investment
Jarrad Harford and Vahap Uysal, Foster School of Business University of Washington
2nd Sep 2011 11:30 am - Room 214/215, H69 - Economics and Business Building
Prior research has shown that differential access to debt markets significantly affects capital structure. In this paper, we examine the effect of access to debt markets on investment decisions. Using debt ratings to indicate bond market access, we find that firms with access are more likely to undertake acquisitions than those without and that firms with bond market access pay higher premiums for their targets. Furthermore, these firms receive less favourable market reaction to their acquisition announcements relative to those of non-related acquirers. The results are robust to addressing the endogeneity of seeking bond market access. Thus, we document significant effects of access to bond markets on a firm's ability to undertake investment and the quality of those investments. The overall bidder announcement reactions are non-negative on average, supporting the conclusion that lack of debt market access creates underinvestment, rather than simply constraining overinvestment.