Financial Reporting Consequences of Sovereign Wealth Funds’ Competing Investment Objectives

• In Event: Research in Financial Accounting I

Abstract

I examine the financial reporting consequences of sovereign wealth fund (SWF) investment. Foreign governments own and control the more than $7 trillion USD held by SWFs, and the prior literature shows their investments are consistent with both financial and political objectives. I predict that foreign governments’ competing financial and political objectives undermine SWF monitoring of target firms vis-à-vis other institutional investors with purely financial objectives. In a difference-in-differences based research design, I find that discretionary accruals are approximately 0.6% of total assets higher in SWF target firms subsequent to SWF investment, relative to a control group of size-, industry- and year-matched firms. I further find the effect increases with the size of the SWF equity stake and is concentrated in firms where SWF investment is more likely to displace an institutional investor with purely financial objectives. The effect of SWF investment attenuates predictably in politically sensitive settings where regulator, media and shareholder scrutiny of SWF investments are high. My findings are insensitive to a wide variety of empirical specifications, earnings management measures and matching methods and cannot be replicated using the placebo of investments made by non-SWF foreign investors. Overall, my results suggest that SWFs are weak firm monitors relative to institutional investors with purely financial objectives.

Author

• David Godsell, University of Illinois-Urbana-Champaign