The toxic triangle of state, stake, and institution: Sovereign wealth fund ownership and firm ESG reputation risk

Abstract

We track the ownership stake of 68 leading Sovereign Wealth Funds (SWF, henceforth) in the sample of listed companies of 80 countries and document a strong positive association between SWF ownership and ESG reputation risk. The results highlight that state expropriation risk and political preoccupation associated with SWF may be detrimental to an investee firm reputation. Our enquiry on the moderating role of institutions reveals the existence of toxic triangle of the state (SWF), the stake (higher SWF ownership) and the institutional distance between SWF and investee firms. We show that proximal formal and informal institutions mitigate the reputation risk stemming from the toxic triangle associated with SWF ownership. The increase in reputation risk is corroborated by deterioration of firm operating and market-based performance associated with SWF ownership. We maintain firm reputation risk could be an important component of the “SWF discounts” which are generally recognised in the investment literature.