TY - JOUR
T1 - Financial Reporting Consequences of Sovereign Wealth Fund Investment
AU - Godsell, David
N1 - Funding Information:
This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made. *Accepted by Yiwei Dou. I am grateful for helpful comments from Yiwei Dou (editor), two anonymous referees, Seung Kyo (Ted) Ahn, In Gyun Baek, Vishal Baloria, Terrence Blackburne, Bryan Brockbank, Donal Byard, Amanda Carlson, Ciao-Wei Chen, Gary Chen, Lucy Chen, Stefano Cascino, Derek Christensen, Will Ciconte, Maria Correia, Somnath Das, Peter Demerjian, Henry Eyring, Ivy Feng, Veljko Fotak, Emily Griffith, Bowe Hansen, Ole-Kristian Hope, Jinglin Jiang (discussant), Seil Kim, Zachary King, Michael Kirschenheiter, April Knill, Kalin Kolev, Allison Koester, David Koo, Stacie Laplante, Heemin Lee, Ugur Lel, Edward Li, Yue Li, Mayer Liang, Brandon Lock, Sara Longo, Daniel Lynch, Richard Macve, Melissa Martin, Darius Miller, Leah Muriel, Sandeep Nabar, Patrick Paige, Shailendra Pandit, Jihwon Park, Aneesh Raghunandan, Vivek Raval, Eddie Riedl, Linette Rousseau, Steven Savoy, David Samuel (⨯2), Bill Schwartz, Hollis Skaife, Theo Sougiannis, Ventsislav Stamenov, Oktay Urcan, Wim Van der Stede, Mary Vernon, Yiding Wang (discussant), Daniel Wangerin, Terry Warfield, Michael Welker, Devin Williams, Michael Wolfe, Huihao Yan, Yue Zhang, and Stacey Zhou as well as workshop participants at the London School of Economics and Political Science, Baruch College, University of Wisconsin–Madison, University of Illinois at Chicago, Oklahoma State University, and the 2021 AAA IAS Research Webinar Series, and audience members at the 2019 AAA Ohio Region Meeting, 2018 Financial Management Association Conference, 2018 Journal of International Accounting Research Conference, 2018 American Accounting Association Annual Meeting, and University of Illinois at Urbana–Champaign Spring 2018 Archival Brown Bag Series. I am grateful to the CPA Centre for Governance at the Queen’s University Smith School of Business for funding the purchase of the Sovereign Wealth Fund Institute SWF Transaction Database used in this study. This paper was previously circulated as “Financial Reporting Consequences of Sovereign Wealth Funds’ Competing Investment Objectives.” † Corresponding author.
Publisher Copyright:
© 2022 The Author. Contemporary Accounting Research published by Wiley Periodicals LLC on behalf of the Canadian Academic Accounting Association.
PY - 2022/9/1
Y1 - 2022/9/1
N2 - Sovereign wealth funds (SWFs) are government-owned institutional investors pursuing political and financial investment objectives. With $8 trillion in assets, SWFs are geopolitical powerbrokers actively participating in global capital markets, yet we know little about the financial reporting consequences of SWF investment. I document evidence supporting the hypothesis that the simultaneous pursuit of political and financial investment objectives renders SWFs weak monitors. Using a staggered difference-in-differences research design, I document economically significant increases in discretionary accruals for SWF target firms after SWF investment, relative to an entropy-balanced control group of non-SWF target firms. Corroborating tests document that the effect of SWF investment on discretionary accruals strengthens with SWFs' equity stake and SWF target firms' earnings management incentives and weakens when regulators curb SWFs' pursuit of political objectives. I highlight SWFs' distinct monitoring effect by replicating my analyses after replacing SWF investment with conventional institutional investment, and document that conventional institutional investment instead reduces discretionary accruals. I further corroborate SWFs' distinct monitoring role among conventional institutional investors using a wide variety of robustness tests employing alternate specifications, samples, and financial reporting proxies. Overall, this study introduces an economically important and fundamentally distinct but little-studied institutional investor to the accounting literature.
AB - Sovereign wealth funds (SWFs) are government-owned institutional investors pursuing political and financial investment objectives. With $8 trillion in assets, SWFs are geopolitical powerbrokers actively participating in global capital markets, yet we know little about the financial reporting consequences of SWF investment. I document evidence supporting the hypothesis that the simultaneous pursuit of political and financial investment objectives renders SWFs weak monitors. Using a staggered difference-in-differences research design, I document economically significant increases in discretionary accruals for SWF target firms after SWF investment, relative to an entropy-balanced control group of non-SWF target firms. Corroborating tests document that the effect of SWF investment on discretionary accruals strengthens with SWFs' equity stake and SWF target firms' earnings management incentives and weakens when regulators curb SWFs' pursuit of political objectives. I highlight SWFs' distinct monitoring effect by replicating my analyses after replacing SWF investment with conventional institutional investment, and document that conventional institutional investment instead reduces discretionary accruals. I further corroborate SWFs' distinct monitoring role among conventional institutional investors using a wide variety of robustness tests employing alternate specifications, samples, and financial reporting proxies. Overall, this study introduces an economically important and fundamentally distinct but little-studied institutional investor to the accounting literature.
KW - earnings management
KW - earnings quality
KW - economic statecraft
KW - sovereign wealth funds
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U2 - 10.1111/1911-3846.12776
DO - 10.1111/1911-3846.12776
M3 - Article
AN - SCOPUS:85129190111
SN - 0823-9150
VL - 39
SP - 2090
EP - 2129
JO - Contemporary Accounting Research
JF - Contemporary Accounting Research
IS - 3
ER -