Financial Reporting Consequences of Sovereign Wealth Funds’ Competing Investment Objectives

• In Event: Financial I

Abstract

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 (DiD) based research design that includes firm and year fixed effects, I find that discretionary accruals increase by approximately 8.2% of average earnings or 0.79% of total assets for SWF target firms after SWF investment, relative to a control group of performance-, industry- and year-matched firms. Using a triple-DiD research design, I find the effect increases with the size of the SWF equity stake. I further find the positive effect of SWF investment on discretionary accruals is stronger for firms with SWF-specific obstacles to governance. Finally, I find that restatements increase for SWF target firms after SWF investment, and that this effect also increases with SWF equity stake. My inferences are robust to several alternate discretionary accrual models, and specifications that address recent concerns about discretionary accrual model confounds, and cannot be replicated using the placebo of new 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