The effect of sovereign wealth funds on the credit risk of their portfolio companies |
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| Affiliation: | 1. EMLYON Business School — Department of Economics, Finance and Control and Research Center on Entrepreneurial Finance (ReCEntFin), France;2. Utrecht University — School of Economics, The Netherlands;1. Universidad del Rosario, Biology Program, Faculty of Natural Sciences and Mathematics, Colombia;2. Humboldt-Universität zu Berlin, Berlin Workshop in Institutional Analysis of Social-Ecological Systems (WINS), Germany;3. Universidad del Magdalena, SMART University Initiative, Colombia;4. Institute for Applied Sustainability Studies, Potsdam, Germany;1. South Champagne Business School, France;2. Bank of Sharjah Chaired Professor, American University of Sharjah, United Arab Emirates;3. UAE University, United Arab Emirates;4. Monastir University, Tunisia;5. Institut de Recherche en Gestion (EA 2354), Université Paris Est, France;1. United Arab Emirates University, United Arab Emirates;2. Montpellier Business School, France |
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| Abstract: | We study how sovereign wealth fund (SWF) investments affect the credit risk of target companies as measured by the change in their credit default swap (CDS) spreads around the investment announcement. We find that the CDS spread of target companies decreases, on average, following an SWF investment. The reduction in the CDS spread is higher when the SWF is established by a politically stable non-democratic country that has a neutral political relationship with the host country of the target company. Our results suggest that creditors expect SWFs to protect target companies from bankruptcy when it is in the interest of their home country to build political goodwill in the host country of the company. |
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