Sovereign wealth fund investments and financial performance of target firms: The disciplinary role of debt in political agenda theory

Abstract

Using a sample of Indian firms acquired by the Norwegian Sovereign Wealth Funds, we investigate whether Sovereign Wealth Fund investments affect the capital structure of firms. We also examine whether leverage serves as a disciplinary mechanism in attenuating the political agenda effects of Sovereign Wealth Fund investments. Our findings reveal that Sovereign Wealth Fund ownership and size reduce leverage. We also find that sovereign wealth fund ownership of 2% and below increases financial performance, supporting the monitoring hypothesis. At above 2% sovereign wealth fund ownership stake, profitability drops significantly, supporting the political agenda hypothesis. We also find that leverage reduces the negative impacts of sovereign wealth fund ownership on the firm's financial performance when the firm's sovereign wealth fund ownership exceeds 2%, suggesting that at certain sovereign wealth fund ownership thresholds, the firm must decide on taking further debt to attenuate government opportunism behaviour and political agendas. Our findings are robust to an alternative measure of sovereign wealth funds, financial constraints, and endogeneity concerns.