Stock Liquidity, Intractable Information and Sovereign Wealth Fund Investment

Abstract

This paper investigates the effect of sovereign wealth fund (SWF) investments on the performance of target firms through a liquidity channel. We test whether the additional information asymmetry from SWF investment causes target firm liquidity to decrease in the medium to long term and whether the decrease in target liquidity creates downward pressure on target firm valuation. Overall, our results suggest that the medium to long-term performance of SWF target firms is driven by two opposing factors. On the one hand, we find strong evidence for uncompensated reduction in stock liquidity in the medium to long-term subsequent to SWF investment. We conjecture this to be a consequence of SWFs' intractability in terms of investing objectives, which potentially include both financial and non-financial motives. On the other hand, we find evidence that SWFs improve firm performance, especially for more financially distressed firms. This is a result of SWF monitoring and certification. The net effect of the two opposite forces is the uncertainty in the performance of SWF target firms.