Friends or Foes? Target Selection Decisions of Sovereign Wealth Funds and Their Consequences

71 Pages Posted: 30 Aug 2008 Last revised: 21 Nov 2014

Jason D. Kotter

Pennsylvania State University - Smeal College of Business

Ugur Lel

University of Georgia - Department of Banking and Finance

Date Written: May 27, 2010

Abstract

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.

Keywords: International finance, sovereign wealth fund, cross-border investment, market efficiency, transparency

JEL Classification: G14, G15, G34, G38

Suggested Citation

Kotter, Jason D. and Lel, Ugur, Friends or Foes? Target Selection Decisions of Sovereign Wealth Funds and Their Consequences (May 27, 2010). Journal of Financial Economics, Vol. 101, 360–381, 2011. Available at SSRN: https://ssrn.com/abstract=1292407 or http://dx.doi.org/10.2139/ssrn.1292407

Jason D. Kotter

Pennsylvania State University - Smeal College of Business ( email )

360 Business Building
University Park, PA 16802
United States

HOME PAGE: http://www.personal.psu.edu/jdk26

Ugur Lel (Contact Author)

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

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