Taming Leviathan: Mitigating Political Interference in Sovereign Wealth Funds’ Public Equity Investments

Abstract

Extant research finds that targets of sovereign wealth fund (SWF) investments experience a weaker stock price reaction at investment announcement than targets of private-sector investments. We find that SWFs from autarchic countries can mitigate this “SWF discount” by signaling a passive stance, namely by investing through subsidiaries, buying small stakes, and not acquiring control. Conversely, SWFs from democratic countries reduce the discounts when signaling an active stance. The long-term operating performance of democratic (autarchic) SWF investment targets is also positively affected by an active (passive) stance. Nonetheless, funds from autarchic countries resort to passivity less often.