The Effect of Sovereign Wealth Funds on the Credit Risk of Their Portfolio Companies

26 Pages Posted: 20 Feb 2011 Last revised: 29 Mar 2014

See all articles by Fabio Bertoni

Fabio Bertoni

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control

Stefano Lugo

Utrecht University - School of Economics

Date Written: March 28, 2014

Abstract

We study how sovereign wealth fund (SWF) investments affect the credit risk of target companies as measured by the change in their credit default swap (CDS) spreads around the investment announcement. Our analysis is based on a sample of 391 SWF investments in 198 companies between 2003 and 2010. Our results indicate that the CDS spread of target companies decreases, on average, following an SWF investment. The reduction in the CDS spread is higher when the SWF is established by a politically stable non-democratic country that has a neutral political relationship with the host country of the target company. The results are robust to different definitions of the dependent variable in terms of event window, CDS maturity and calculation of the benchmark CDS spread. Our results suggest that creditors expect SWFs to protect target companies from bankruptcy when it is in the interest of their home country to build political goodwill in the host country of the company.

Keywords: Sovereign wealth funds, credit risk, CDS spread, Certification

JEL Classification: G32, G33, G15, F34, G28

Suggested Citation

Bertoni, Fabio and Lugo, Stefano, The Effect of Sovereign Wealth Funds on the Credit Risk of Their Portfolio Companies (March 28, 2014). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1763173 or http://dx.doi.org/10.2139/ssrn.1763173

Fabio Bertoni (Contact Author)

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control ( email )

23, av. Guy de Collongue BP 174
69132 Ecully Cedex
France

Stefano Lugo

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC
Netherlands

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