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

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.