Friends or Foes? Target Selection Decisions of Sovereign Wealth Funds and Their Consequences
Jason D. Kotter
The Stephen M. Ross School of Business at the University of Michigan
Virginia Polytechnic Institute & State University - Department of Finance, Insurance, and Business Law
May 27, 2010
Journal of Financial Economics (JFE), Forthcoming
This paper examines investment strategies of Sovereign Wealth Funds (SWFs), their effect on target firm valuation, and how both of these are related to SWF transparency. We find that SWFs prefer large and poorly performing firms facing financial difficulties. Their investments have a positive effect on target firms’ stock prices around the announcement date but no substantial effect on firm performance and governance in the long-run. We also find that transparent SWFs are more likely to invest in financially constrained firms and have a greater impact on target firm value than opaque SWFs. Overall, SWFs are similar to passive institutional investors in their preference for target characteristics and in their effect on target performance, and SWF transparency influences SWFs’ investment activities and their impact on target firm value.
Number of Pages in PDF File: 71
Keywords: International finance, sovereign wealth fund, cross-border investment, market efficiency, transparency
JEL Classification: G14, G15, G34, G38working papers series
Date posted: August 30, 2008 ; Last revised: October 2, 2012
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