Sovereign Wealth Funds, Institutional Environments, and Corporate Governance

Abstract

We investigate whether and how sovereign wealth funds’ (SWFs) investment affects target firms’ corporate governance. Using a sample of 2,082 unique firms across 43 countries from 2002 through 2015, and applying a difference-in-differences (DiD) approach, we find that corporate governance of target firms decreases after equity purchases by SWFs. This evidence holds when we use propensity score matching, instrumental variable regressions, placebo tests, dynamic effects analyses, and alternative control samples and measures of corporate governance. Reinforcing our main evidence, we also show that SWFs’ equity investment is positively associated with target firms’ earnings management and corporate investment, but negatively associated with investment efficiency. Moreover, the negative effect of SWFs on target firms’ corporate governance is more pronounced when SWF home countries have a lower quality of investor protection, corruption control, governmental effectiveness, and law enforcement than the host countries. Target firm value is also found to decrease after SWF equity investment. Overall, these results are consistent with the view that SWFs, as passive investors, do not provide the same monitoring benefits as other institutional investors.