Revisiting the Monitoring Role of Sovereign Wealth Funds: Evidence from a Quasi-Experimental Setting

Abstract

This paper revisits the monitoring role of sovereign wealth funds (SWFs). SWFs are state-owned investment organizations and constitute a specific type of institutional ownership. Exploiting a shock in SWF investment holdings for the U.S. stock market and using standard Difference-in-Differences methodology, we provide three main findings. First, we document that treatment firms improve in terms of firm performance over a three-year period following the inclusion to the SWF investment portfolio. Second, and in line with an active and strategic role of SWFs, we show that especially treatment firms with governance and monitoring deficiencies prior to the SWF investment benefit subsequently in terms of firm performance. Third, we document that, among other things, a superior stock picking quality and with that a rather passive investment strategy does not explain our long- term performance findings. Overall, our study extends prior research by providing plausibly causal evidence on the long-term monitoring consequences of SWFs.