Sovereign Wealth Funds Investment Research Articles

The international political economy of Saudi Arabia: Sovereign fund and foreign policy

AbstractThis article develops a framework for attributing motivations to Sovereign Wealth Fund (SWF) investment by noting that there are two major subdivisions, those that argue that the investments are undertaken due to macroeconomic factors and those that argue there is a political element as well. The political literature is divided into three subcategories of domestic political considerations, geopolitical competition and economic diplomacy. The literature of the Public Investment Fund (PIF) does not include any discussion of economic diplomacy as a consideration, an omission this article seeks to rectify. Using a realist understanding of international political economy (IPE), the article explores the influence of elites, the nature of PIF investments in America, India, China and Russia, and collaboration with other SWFs on investment. The article concludes that economic diplomacy should be considered as one of a multitude of variables that determine how and where the PIF invests.

Do SWF investments matter for bond ratings? The role of corporate governance

AbstractWe investigate the impact of sovereign wealth funds (SWFs) equity ownership on bonds’ credit ratings of their target firms. Using a sample of 2045 bonds issued by 324 SWF target firms from 16 countries over the period 1996–2020, we find evidence linking SWF investments to lower likelihood of bond rating upgrades. Consistent with value‐reducing political agenda hypothesis, our results suggest that credit rating agencies perceive SWFs as a structure that could affect the quality of corporate governance and harm bondholder interests by leaving them vulnerable to losses. Our results also show that credit rating could be improved: (i) with SWF transparency and experience; (ii) when SWFs take a more passive investment stance; and (iii) within the financial crisis period. Finally, and interestingly, using generalized structural equation modelling, we provide evidence supporting the mediating role of target firm's corporate governance quality in the relationship between SWF investments and bond ratings. Our findings are robust to controls for the endogeneity and heteroscedasticity issues and to alternative sample compositions and regression frameworks.

The Past, Present, and Future of Gulf Sovereign Wealth Fund Investments in China

AbstractThis article explores sovereign wealth fund investments by Gulf Cooperation Council member states in China's equity market. Using data from Chinese stock exchanges, we analyze patterns of shareholding over two decades, across different sectors and among distinct funds, and compare them to their non‐Gulf counterparts. We reveal a gradual upward trajectory in both the scale and diversity of investments by Gulf funds, indicating growing engagement with the Chinese equity market. We anticipate a continuation of current trends, albeit with larger volumes and potential expansions into technological and emerging sectors that align with Gulf interests. We project that the deepening financial linkages between China and the Gulf could give rise to a mini petro‐yuan system operating under the dominance of the American dollar. This does not presage a transformation in China‐Gulf relations but should be understood within the increasing complexity of their broader economic ties. The article is part of a special issue examining the responses of Gulf countries to rising Sino‐American competition, edited by Andrea Ghiselli, Anoushiravan Ehteshami, and Enrico Fardella.

Beyond Borders, Beyond Certainty: A Critical Analysis of Legal Frameworks for Sovereign Wealth Fund Investments

Beyond Borders, Beyond Certainty: A Critical Analysis of Legal Frameworks for Sovereign Wealth Fund Investments

The CSR Balancing Act: The Impact of Sovereign Wealth Fund Investments on Investee Firms

The CSR Balancing Act: The Impact of Sovereign Wealth Fund Investments on Investee Firms

Sovereign Wealth Funds and Corporate Investments: Evidence from Norway Sovereign Wealth Fund target firms

Using a sample of 105 Indian firms acquired by the Norwegian Sovereign Wealth Funds, we investigate whether Sovereign Wealth Fund investments affect the corporate investments of firms., particularly, whether Norway sovereign wealth fund serves as a disciplinary mechanism in reducing the mangers opportunistic behavior. Our findings reveal that Norway Sovereign Wealth Fund ownership and size reduce corporate investments, supporting the political agenda hypothesis, suggesting that the firm must decide on taking large ownership stakes of Norway Sovereign wealth funds ownership to attenuate mangers opportunism behavior and political agendas. Our findings are robust to an alternative measure of sovereign wealth funds and endogeneity concerns.

Sovereign wealth funds and cost of debt: Evidence from syndicated loans

We examine how sovereign wealth fund (SWF) investments affect target firms' cost of debt. Using a large sample across 39 countries from 2004 to 2019, and applying a difference-in-differences (DiD) approach, we find that the loan spread of target firms decreases after equity investment by SWFs. This result holds when we use alternative specifications, and address endogeneity issues. Moreover, the negative effect is more pronounced for borrowing firms with higher risk. We also show that SWFs help reduce the cost of debt when they have a strong connection with the lead banks.

Sovereign wealth fund investment in venture capital, private equity, and real asset funds

This paper examines the performance of limited partners’ (LPs) investments in venture capital, private equity, and real asset funds (referred to as “alternative asset funds”) from 52 countries around the world over the period of 1995 to 2020. The data indicate that sovereign wealth funds (SWFs) are significantly slower to fully liquidate and earn lower returns from their investments, particularly from their investments in venture capital funds. The longer duration and lower performance of SWFs is more pronounced for strategic SWFs than savings SWFs. We show that SWFs tend to invest in venture capital funds located in countries with lower-quality disclosure indices. Additionally, SWFs are more often involved in buyout funds and in larger funds that have greater number of limited partners. Overall, the data indicate sovereign wealth funds make large investments in alternative asset funds with a longer-term view and earn lower financial returns, which is consistent with strategic and political SWF investment objectives.

Sovereign wealth fund investments and financial performance of target firms: The disciplinary role of debt in political agenda theory

Using a sample of Indian firms acquired by the Norwegian Sovereign Wealth Funds, we investigate whether Sovereign Wealth Fund investments affect the capital structure of firms. We also examine whether leverage serves as a disciplinary mechanism in attenuating the political agenda effects of Sovereign Wealth Fund investments. Our findings reveal that Sovereign Wealth Fund ownership and size reduce leverage. We also find that sovereign wealth fund ownership of 2% and below increases financial performance, supporting the monitoring hypothesis. At above 2% sovereign wealth fund ownership stake, profitability drops significantly, supporting the political agenda hypothesis. We also find that leverage reduces the negative impacts of sovereign wealth fund ownership on the firm's financial performance when the firm's sovereign wealth fund ownership exceeds 2%, suggesting that at certain sovereign wealth fund ownership thresholds, the firm must decide on taking further debt to attenuate government opportunism behaviour and political agendas. Our findings are robust to an alternative measure of sovereign wealth funds, financial constraints, and endogeneity concerns.

Sovereign wealth funds in the post-pandemic era

Sovereign wealth funds (SWFs) have over $11.5 trillion in assets under management as of February 2023. Most of these 176 funds are sponsored by non-Western countries and their growth has made SWFs important international investors, particularly in private equity funding. We first define SWFs, then discuss their evolution into today’s categories of stabilization, savings, and development/strategic funds. We discuss the documented importance of SWF funding sources – oil sales revenues versus excess reserves from export earnings – and summarize the empirical literature studying how SWFs allocate funds geographically and across asset classes. Next, we summarize empirical evidence on the impact of SWF stock investments on target firm financial and operating performance and discuss the evidence showing that the announcement of SWF investment causes target firm stock prices to rise in the short term, but the positive impact is significantly less than the positive return following large stock purchases by private investors, and the longer-term effect of SWF investment on target firms is generally negative. SWFs’ recent focus on promoting ESG policies of investee companies is assessed and briefly compared to the effectiveness of other institutional investors’ ESG efforts.

Target firms’ characteristics and the effects of sovereign wealth funds’ investments: Does cultural context of SWFs matter?

This paper investigates whether the determinants and effects of sovereign wealth fund (SWF) investments vary across SWFs' countries of origin. We classify SWFs based on the national culture of their home countries. On the side of investment motives, our findings show different nuances across SWFs classified by cultural origins. Furthermore, the post-investment approach varies among SWFs distinguished on the basis of the cultural traits of their home country. As a whole, these findings confirm that the heterogeneity of the cultural origin of SWFs matters in terms of selection criteria and effects.

Sovereign Wealth Fund Investment in Venture Capital, Private Equity, and Real Asset Funds

Sovereign Wealth Fund Investment in Venture Capital, Private Equity, and Real Asset Funds

Past, Current and Future Trends in Sovereign Wealth Fund Investments

Past, Current and Future Trends in Sovereign Wealth Fund Investments

Evolving Sovereign Wealth Fund under Infrastructure Funding Scarcity: A Literature Study

Objective – There are three primary focuses of this study, namely: to understand past literature on sovereign wealth fund (SWF) pattern of development, the impact of SWF investment on target firm financial performance, and how SWF fosters infrastructure development in Indonesia Methodology/Technique – The methodologies of this study are descriptive and structured systematic reviews. Six dimensions were the focus of this literature review which are the basis for sorting and grouping the 1683 publication journals. Those six dimensions are SWF characteristics, SWF target firm characteristics, country characteristics, deal characteristics, research methods, and level of analysis Findings –The SWF objectives and pattern of development in a country depending on the country-specific conditions which could evolve over time. There have been many past types of research on SWF development in different countries. Past research provided differing outcomes in various aspects of SWF development from one country to the others. In the case of Indonesia, INA is expected to provide global capital access in filling in the funding gap for Indonesia's infrastructure development. For that reason, this research is seeing an urgency to observe how Indonesia SWF manages its investment portfolio in unique infrastructure development and its impact on the national economic growth. Furthermore, past research findings described that the impact of institutional investors such as SWF on firm performance is still unclear. Many questions concerning the financial aspects of SWF’s activities still remain relatively unanswered. The outcomes of this literature review provide multiple bases for future research with a mixed case study method. Novelty – This research observes and compares various SWF patterns of development in different countries (multiple cases). Indonesia’s SWF wealth fund was a newly established government agency and has not been widely explored in past research. How the government of Indonesia overcomes funding scarcity for infrastructure development provides a unique experience. Type of Paper: Empirical JEL Classification: F30, M20. Keywords: Indonesia Sovereign Wealth Fund; Firm Value; Infrastructure Development; Structured Literature Review Reference to this paper should be made as follows: Raharjo, A.W; Wiryono, S.K; Rahadi, R.A. (2022). Evolving Sovereign Wealth Fund under Infrastructure Funding Scarcity: A Literature Study, J. Bus. Econ. Review, 7(1), 75–91. https://doi.org/10.35609/jber.2022.7.1(3)

Financial Reporting Consequences of Sovereign Wealth Fund Investment*

ABSTRACTSovereign wealth funds (SWFs) are government‐owned institutional investors pursuing political and financial investment objectives. With $8 trillion in assets, SWFs are geopolitical powerbrokers actively participating in global capital markets, yet we know little about the financial reporting consequences of SWF investment. I document evidence supporting the hypothesis that the simultaneous pursuit of political and financial investment objectives renders SWFs weak monitors. Using a staggered difference‐in‐differences research design, I document economically significant increases in discretionary accruals 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. I highlight SWFs' distinct monitoring effect by replicating my analyses after replacing SWF investment with conventional institutional investment, and document that conventional institutional investment instead reduces discretionary accruals. I further corroborate SWFs' distinct monitoring role among conventional institutional investors using a wide variety of robustness tests employing alternate specifications, samples, and financial reporting proxies. Overall, this study introduces an economically important and fundamentally distinct but little‐studied institutional investor to the accounting literature.

Can ESG-Responsible Investing Attract Sovereign Wealth Funds’ Investments? Evidence From Chinese Listed Firms

Global sustainable development focuses on environmental, social, and corporate governance (ESG) responsible investment as a leading-edge topic in global asset management. Because of the long-term financial returns and positive social benefits of ESG-responsible investment, ESG factors have been introduced into the investment decision-making and risk management of Sovereign Wealth Funds (SWFs). Therefore, this study examines the effect of firms’ ESG-responsible investments on the investment scale of SWFs. We also examine the different influences of ESG factors in attracting SWFs’ investment, which is of some significance in discussing the investment preferences of SWFs. We find that ESG performance attracts SWFs’ investment by increasing ROA and reducing risk. The relationship between ESG and SWFs’ investments may help managers adopt appropriate strategies to attract SWFs investments and achieve coordinated development.

State capitalism, capitalist statism: Sovereign wealth funds and the geopolitics of London’s real estate market

We respond to the special issue’s call for a multiscalar, historicised approach to state capitalism through an exploration of Sovereign Wealth Fund investment into London real estate. We point to how the UK’s ostensibly market-led recovery since the 2008 financial crisis has relied in part on attracting ‘patient’ state capitalist investments. In this, we contextualise the relational regulation of real estate markets as the outcome of intersecting state projects by considering the investment motivations of the single largest owner of London real estate, the Qatari Investment Authority, and the utilisation of their investment by UK governance actors. Focusing on Qatari Investment Authority’s involvement in London’s Olympic Village, we highlight how this strategic coupling in the real estate market realised domestic and geopolitical aims for the Qataris while facilitating the UK government's strategy to ameliorate London’s housing shortage by fostering a ‘build to rent’ asset class. In doing so, we contribute to readings of state capitalism as an ‘uneven and combined’ process beyond the traditional state/market binary by placing sovereign wealth fund investment into the context of city governance, the geopolitics of real estate and resultant relational forms of regulation.

The corporate governance consequences of small shareholdings: Evidence from sovereign wealth fund cross‐border investments

AbstractResearch Question/IssueExisting research on sovereign wealth funds (SWFs) has largely explored how they affect target firm value, overlooking the role they play in corporate governance. This paper examines the impact of SWFs' cross‐border equity acquisitions on targets' corporate governance and the role the institutional environment of SWF countries plays in shaping this impact.Research Findings/InsightsWe use a difference‐in‐differences approach and find that, on average, SWF investments are negatively related to target firms' corporate governance. This impact holds for small SWF cross‐border equity investments only and is stronger for firms that are weakly governed and for those located in jurisdictions with weak shareholder protection. The negative relation is more pronounced when SWFs' home countries have lower‐quality investor protection, corruption control, governmental effectiveness, and law enforcement than their host countries. We find further that SWF investments are positively associated with target firms' earnings management and negatively associated with investment efficiency. Finally, target firm value is found to decrease after SWF investments.Theoretical/Academic ImplicationsThe evidence that SWFs' small equity investments are detrimental to target firms' corporate governance is broadly consistent with the view that SWFs are passive investors. Managers can exploit this passivity, as evidenced by higher earnings management, reduced investment efficiency, and lower firm value.Practitioner/Policy ImplicationsThis study has important policy implications for investors, SWF managers, and policymakers. The passive role of SWFs in corporate governance should prompt minority shareholders to look for alternative monitoring mechanisms. Moreover, SWF managers may realize the need to target firms with strong corporate governance at the outset to compensate for the post‐acquisition decline. Host country policymakers may need to condition SWF investments on commitments to improve the corporate governance of investee firms, which would be akin to the performance requirements imposed on inward foreign direct investment (FDI). This is particularly relevant for SWFs from countries with weak institutions that are targeting countries with strong institutions.

GCC Sovereign Wealth Funds: Why do they take control?

In this paper, we investigate what are the drivers of cross-border equity acquisitions made by Sovereign Wealth Funds (SWFs) of the Gulf Cooperation Council (GCC) countries. GCC SWFs are considered as relatively opaque investors and strongly politicized, raising some concerns for perceived political and security risks. Using both Logit and ordered Logit models, we test if the usual determinants of SWFs investments still stand when we look at large or majority acquisitions made by GCC SWFs. Unlike results found in the literature investigating the determinants of SWFs cross-border investments, we find that GCC SWFs do not take into account the financial characteristics of the target firm by taking majority stakes, apart from its financial wealth. The economic, institutional and financial factors of the target country as well as the existence of trade agreements between both countries do not matter in their acquisition/control decision. We also find that firms operating in strategic sectors are targeted by GCC SWFs for diversification purposes but not for the purpose of acquisition or control. Overall, our results lend support to the hypothesis that GCC SWFs differ from other institutional investors in terms of acquisition decision strategy and that financial and commercial motives are not the exclusive target of their acquisition strategy.

Sovereign Wealth Fund Investment in Venture Capital, Private Equity, and Real Asset Funds

Sovereign Wealth Fund Investment in Venture Capital, Private Equity, and Real Asset Funds