Friends or Foes? The Stock Price Impact of Sovereign Wealth Fund Investments and the Price of Keeping Secrets | Zendy

Jason D. Kotter | Zendy; Uǧur Lel | Zendy

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Friends or Foes? The Stock Price Impact of Sovereign Wealth Fund Investments and the Price of Keeping Secrets

Author(s) -

Jason D. Kotter,

Uǧur Lel

Publication year - 2008

Publication title -

international finance discussion paper

Language(s) - English

Resource type - Journals

eISSN - 2767-4509

pISSN - 1073-2500

DOI - 10.17016/ifdp.2008.940

Subject(s) - sovereign wealth fund , shareholder , business , transparency (behavior) , profitability index , stock price , corporate governance , monetary economics , stock (firearms) , sample (material) , control sample , economics , financial system , finance , market economy , incentive , mechanical engineering , paleontology , chemistry , food science , series (stratigraphy) , political science , law , biology , engineering , chromatography

This paper examines the stock price impact of 163 announcements of Sovereign Wealth Fund (SWF) investments. We document an average positive risk-adjusted return of 2.1 percent for target firms during two days surrounding SWF acquisition announcements. The announcement effect is both statistically and economically significant. A multivariate analysis shows that the degree of transparency of SWF activities is an important determinant of the market reaction, and both the SWF and the existing shareholders of the target firm benefit from improved SWF disclosure. In addition, target firms' profitability, growth, and governance do not change significantly in the three-year period following the SWF investment relative to a control sample. These results are robust to a battery of tests. Overall, our findings suggest that SWF investments convey a positive signal to market participants about the target firm, increased SWF transparency is enjoyed by both the SWF and existing shareholders, and SWFs are passive investors.

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