Financial reporting consequences of sovereign wealth fund investment

Sovereign wealth funds (SWFs), with $8 trillion in assets, are government-owned institutional investors pursuing political and financial investment objectives. I document evidence supporting the hypothesis that simultaneous pursuit of political and financial investment objectives renders SWFs weak monitors. Using a staggered difference-in-differences research design, I find that discretionary accruals increase by 0.31 percent of total assets 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. Reanalyses documenting that conventional institutional investment instead reduces discretionary accruals corroborate SWFs’ distinct monitoring effect. Robustness tests employing alternate specifications, samples, and financial reporting proxies further corroborate inferences regarding SWFs’ distinct monitoring role among institutional investors.