Determinants of Large Versus Small Cross-Border Acquisitions for Sovereign Wealth Funds

We examine the determinants of equity shares purchased by Sovereign Wealth Funds (SWFs). Based on the literature of cross-border acquisitions and entry mode choice theory, we shed light on the real drivers of these state-owned funds when they buy small or large stakes in cross-border target firms, for example: is the decision based on the target firm's characteristics? At a country-level? Is the decision sector-oriented? Or, are there financial, economic or political motives for the entry mode choice decision? Using a two-part fractional regression model together with an original dataset of SWF acquisitions and a control group of 6551 observations over 2000-2015, we find that the decision to invest and the decision on the share of equity to be acquired are two distinct processes. Therefore, ignoring the two-stage nature of the investment decision would lead to serious misspecification problems. Our results support most hypotheses derived from cross-border acquisition theory, which indicates that SWFs take the investment decision in cross-border target firms by trying to reduce transaction costs and information asymmetry, and also by taking the legal and institutional environment of the country into consideration. However, the fact that they do not hesitate to take large shares or to acquire targeted firms that are considered to be strategic and located in politically unstable countries suggests that their motives may go beyond pure profit maximization.