Analyzing the Impact of Credit 
Ratings on the Mode of Financing Employed by Indian Acquiring Companies

This study examines the relationship between four different credit rating variables, namely the presence of credit ratings, the longevity of credit ratings, the division of credit ratings in the speculative vs investment grade category and the levels of credit ratings on the mode of payment employed by the Indian acquiring companies. Further, the impact of all these rating variables is analyzed on the preference for the mode of funding by group-affiliated acquiring companies. The results imply that the mode of payment is influenced by only two rating variables, namely the longevity of credit ratings and the levels of credit ratings. The reason is that both these variables hedge the information gap on the part of the external funds’ providers, specifically the lenders, regarding the creditworthiness of the acquiring companies and enable them to lend money to these companies comfortably. This, in turn, increases the likelihood of such companies funding their acquisitions with cash. The results remain the same for the group-affiliated acquiring companies and are consistent with the information asymmetry theory. The study contributes to the existing literature by extending the findings on the association between the mode of payment in mergers and acquisitions (M&As) and credit ratings to an emerging market like India. The findings of the study can be generalized to other emerging economies where group affiliation and ownership concentration are prevalent.