Sovereign Wealth Fund Investments and Stock Prices: The Effect of Target Industry and Location

Abstract

In this work we investigate the determinants of sovereign wealth fund (SWF) investments’ stock prices. We focus on the location of the investment (domestic versus cross-border investments) and on the target industry (strategic versus non-strategic). We use a new dataset on SWF investments and stock prices, whose number of transactions is comparable with that used in the most popular SWF studies. To control for the endogeneity of the location and target industry choices, we use two identification strategies: an OLS estimation with residuals clustered at SWF country-level and SWF-specific fixed effects to control for the quality/experience of each fund, and an Instrumental Variables (IV) estimation. Our results show that on a 50-days window around the SWF investment, cross-border investments have an average higher increase in stock price than domestic SWF investments. While, on the same time window, SWF investments in strategic industries show an higher drop in stock price than SWF investments in non-strategic industries. We also find that the higher is the politicization of the fund, and the higher is the stock price drop. Our results are robust to controls for the presence of bilateral political relations between the SWFs’ and target country, fund type (SWFs vs. Sovereign Pension Reserve Funds), fund opacity, equity stake of the investment, the use of an investment vehicle, the target country’s market capitalization/GDP ratio, and time effects.

Keywords: sovereign wealth funds, institutional investors, cross-border acquisitions, location choice, strategic industry, stock price

JEL Classification: E44, F21, F65, G11, G14, G15, G23, G34