Corruption Risk Exposure of the Norwegian Government Pension Fund Global : An empirical approach to examine corruption risk of and its implications for the Government Pension Fund Global

In this thesis, we examine the bribery risk exposure of the Norwegian Government Pension Fund Global (GPFG) and analyze whether the pensions fund historically benefitted from being invested in companies with elevated bribery risk. Through a comparative study, we first contrast the bribery risk exposure of the countries in which the Oil Fund is invested with that of a peer group of three other sovereign wealth funds. Afterward, we examine whether the bribery risk of the investees’ countries is an accurate indicator of the actual bribery risk of the firms. For this purpose, we develop an indicator, the Firm Bribery Risk Indicator (FBRI), which estimates corruption risk at the firm level by identifying red flags that signal risk of illicit behavior. The relation of this measure, approximating the actual bribery risk of a firm, to the country-level risk is analyzed. Finally, by applying a Fama-French five-factor model, we evaluate whether the fund historically benefited from being invested in companies that we previously identified to inhere an elevated bribery risk. Our results show that the GPFG’s relative number of equities and share of total assets invested in firms from high-risk countries exceeds those of its peers. However, we further find that the bribery risk of the country is an insufficient estimator of actual bribery risk. Thus, our findings suggest that a more detailed analysis of the bribery risk of the funds’ investments is required to make a valid statement about the overall bribery exposure of each fund. Simply comparing the country-level bribery risk does not allow to derive meaningful insights but only grants a first, surficial impression. Additionally, we examine the relation between country-level risk and the different risk determinants considered by the FBRI. We find that on average, firms listed in countries with high bribery risk scores are more often state-owned, have slightly less effective anti-corruption systems in place, and have subsidiaries in more risky countries. However, our findings do not suggest systematic differences in operating industries, political proximity, and the existence of previous bribery allegations of firms in respect to their country’s bribery risk. Our financial performance analysis revealed that the Oil Fund financially benefitted from being invested in firms with high corruption risk. However, we could not establish significant differences between the high- and low-risk portfolios’ abnormal returns