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date: 24 March 2019

Abstract and Keywords

In the past decade, sovereign wealth funds (SWFs) have been very active in western economies with massive liquidity injections and numerous stakes in various strategic areas. While a vast literature has documented their influence on firms’ behavior and equity valuation, their impact on the whole economy has been largely unexplored. This chapter investigates the aggregate impact of SWFs’ investments at the industrial level. Using a panel of ten European countries from 2006 to 2012, a relevant instrumental variables strategy is used to circumvent potential double causality between returns of the recipient countries’ stock market indices and SWFs’ investments. The results show a positive and significant impact of SWFs’ investments for five sectoral indices out of ten. Looking at conditional effects, it does not find that this relationship is affected by either the availability of alternative sources of financing in the economy—consistent with the liquidity argument—or different volatility regimes.

Keywords: sovereign wealth funds, industry-level analysis, stock market index, endogeneity, instrumental variable, government ownership, firm performance, industry performance, externality, cross-border investment

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