New Capital Investment vs. M&A: Evidence from Russian Public Corporates

Abstract

There are two major types of investments — capital investment and investment in M&A deals. In this paper the author examines the relationship between new capital investments and investments in acquisitions in Russia using data for more than one hundred companies in 2004–2014. The period is split into two sub-samples — period of rapid growth (before the global financial crisis of 2008) and post-crisis one (after 2009). Our results show that relationship between fixed investments and investments in acquisitions is opposite for two periods. In the first period, relationship between two types of investment was positive or insignificant which possibly means that companies did not face the trade-off between investment forms. After the global financial crisis, when monetary conditions and access to external capital markets for Russia tightened considerably, the relationship between investment in new capital and investment in acquisitions became negative. It proves that companies faced a trade-off between two investment forms. Moreover, acquisitions became dependent on company's profitability. Such a trade-off can be crucial for developing economies since they are more dependent on external financing. These results can provide policy implications given the new understanding of financial constraint significance for investment.