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. In a new paper, we investigate the determinants of this “SWF discount” and possible mitigating mechanisms. We find that SWFs from non-
democratic countries can mitigate this discount by signaling a passive stance by investing through subsidiaries, buying small stakes, and refraining from acquiring control. Conversely, SWFs from democratic countries suffer from smaller discounts when signaling an active stance. Consistent, long-term operating performance of democratic (autarchic) SWF investment targets is positively affected by an active (passive) stance. Despite the negative impact, funds from autarchic countries are more likely to take an active stance.
