Friends or foes? The stock price impact of sovereign wealth fund investments and the price of keeping secrets

Jason Kotter and Ugur Lel

No 940, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: 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.

Keywords: Sovereign wealth fund; International finance (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (30)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:940

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