Bond Market Access and Investment

In this paper, we examine the effect of access to debt markets on investment decisions. We find that firms with debt ratings are more likely to undertake acquisitions than non-rated firms and that rated firms pay higher premiums for their targets. Furthermore, these firms receive less favorable market reaction to their acquisition announcements relative to those of non-rated acquirers. Thus, this paper documents significant effects of access to debt 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 constrains positive NPV investment rather than simply mitigating agency costs.