Government Investment Behavior: Evidence from California Pooled Money

Abstract

Local governments are playing an increasingly prominent role in the global investment area by holding large publicly-held pools of assets. The incentives for bureaucrats’ engagement in financial investment and their expertise are presumably distinctive from professional investors in the private markets. Therefore, it’s intriguing to study these government-held funds’ investment patterns and performance. To investigate these problems, this paper uses a hand-collected and novel data set that covers the transaction details of the California government pooled money investment account (PMIA) from 2014 to 2020. This paper presents a statistical analysis of the investments in the last 7 years and study the differences and similarities in behavior and performance between government investments and mutual funds. This paper also presents a model to measure the similarity of funds. I construct two relevant funds that require different levels of sophistication in selecting securities and activeness but are similar to the PMIA in other dimensions. Then I compare their performances with PMIA’s performance in the next period. This paper concluded that the government does perform worse and it is not because of their passive strategy but because of a lack of sophisticated skill. This paper provides new evidence of government investment behavior by rigorous statistical methods.