The Corporate Governance Consequences of Small Shareholdings: Evidence from Sovereign Wealth Fund Cross-Border Investments

Abstract

We use a difference-in-differences approach, and find that, on average, SWF investments are negatively related to target firms’ corporate governance. This impact holds for small SWF cross-border equity investments only, and is stronger for firms that are weakly governed and for those located in jurisdictions with weak shareholder protection. The negative relation is more pronounced when SWFs’ home countries have lower-quality investor protection, corruption control, governmental effectiveness, and law enforcement than their host countries. We find further that SWF investments are positively associated with target firms’ earnings management, and negatively associated with investment efficiency. Finally, target firm value is found to decrease after SWF investments.