The sovereign wealth funds risk premium: Evidence from the cost of debt financing

Abstract

We build on recent SWF literature that documents an equity discount for SWF investments and extend it to bond markets to investigate whether SWFs represent a threat or an opportunity to bondholders. We find robust evidence supporting the political agenda hypothesis which points to the existence of a “SWF bond risk premium”. Compared to other government shareholding types, we also find that SWF ownerships present higher risk to bondholders and result in higher increase in the target firm's cost of debt. Furthermore, this SWF bond risk premium is larger during non-crisis periods and for SWFs originating from autarchic countries. Interestingly, we show strong evidence that SWFs may signal a passive investment stance and reduce the SWF bond risk premiums by: i) investing through separate investment vehicles, ii) targeting firms with an existing major shareholder, iii) improving their internal governance, and iv) increasing their transparency.