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Sovereign wealth fund investment and the return-to-risk performance of target firms

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  • Knill, April M.
  • Lee, Bong Soo
  • Mauck, Nathan

Abstract

This paper investigates the relationship between sovereign wealth fund (SWF) investment and the return-to-risk performance of target firms. Specifically, we find that target firm raw returns decline following SWF investment. Though risk also declines following SWF investment, we find that SWF investment is associated with a reduction in the compensation of risk over the 5years following acquisition. Firm volatility decomposition suggests that idiosyncratic risk is what mainly drives these impacts toward decline. Employing a multinomial logit framework wherein combinations of target returns and risk movements are categorized, we see that, in cases of foreign investment, SWFs’ target firm performance most closely resembles that of other government-owned firms. The observed results are inconsistent with predictions of higher volatility and improved returns due to monitoring firm activities from the institutional investor literature. This suggests that SWFs may not provide some of the benefits that are offered by other institutional investors.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 21 (2012)
Issue (Month): 2 ()
Pages: 315-340

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Handle: RePEc:eee:jfinin:v:21:y:2012:i:2:p:315-340

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Web page: http://www.elsevier.com/locate/inca/622875

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Keywords: Sovereign wealth fund; Risk-return performance;

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Cited by:
  1. Ang, James & Knill, April & Mauck, Nathan, 2014. "Investment Opportunity Sets of Real Assets: An International Empirical Study Based on Ownership Types," MPRA Paper 53359, University Library of Munich, Germany.
  2. Sun, Xiaolei & Li, Jianping & Wang, Yongfeng & Clark, Woodrow W., 2014. "China's Sovereign Wealth Fund Investments in overseas energy: The energy security perspective," Energy Policy, Elsevier, vol. 65(C), pages 654-661.

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