Sovereign Wealth Funds Investment Research Articles

Sovereign wealth fund governance and national culture

As sovereign wealth funds (SWFs) are owned and directed by sovereign governments which often have non-economic strategic motives and concomitant lack of transparency, there is much confusion, suspicion, and concern regarding the purpose of their investments. Strategic or non-economic motives for SWF investments are usually conveyed via respective governing boards of directors. Therefore, there is much need for understanding SWF governance. Using data for 49 large SWFs globally, we document significant and economically important evidence of the impact of national culture on SWF governance. Even when controlling for the quality of respective national governance, we find that poorer SWF governance is associated with the cultural dimensions of power distance, individualism, and most likely masculinity; while better SWF governance is associated with long-term orientation, indulgence and uncertainty avoidance. These results are consistent with what others have noted: good governance means different institutional dynamics in different countries (cultures). We also find that SWF governance is negatively associated with greater investment in foreign assets. Policy makers, capital-market participants, and managers will be interested in these results, as SWFs have become large and important global investors.

Revisiting the Monitoring Role of Sovereign Wealth Funds - Evidence from a Quasi-Natural Experiment

Using a shock in the expansion of the Norwegian Government Pension Fund Global (GPFG), we examine the long-term organizational consequences of sovereign wealth fund (SWF) investments. Findings from a difference-in-differences test show that firms improve in firm value following the inclusion to GPFG’s U.S. equity portfolio. Cross-sectional tests document that this effect is stronger for firms with higher monitoring demand and higher likelihood to face passive monitoring pressure. Additional analyses indicate that GPFG engagement improves firms’ governance quality, litigation risk, and myopic investment behavior. Our findings are generalizable to monitoring-sensitive SWFs and suggest that these investors create value for firms.

Sovereign Wealth Funds and Ethical Investment Guidelines: The Role of Regime Type

In the popular discourse it has often been implied that SWF investments from non-Western economies with low democracy levels are driven by political imperatives. If that is true then how can we explain that SWFs from Western democratic countries adopt ethical investment guidelines, which are often linked to politics? In order to explain that the present article takes a comparative approach by looking at regime types, domestic debates and the sequences in which ethical investment guidelines were adopted across SWFs. Therefore it looks at 10 of the most transparent SWFs. High levels of transparency allows for close scrutiny and monitoring of the SWFs investment practices, specifically by a country’s population. However, the rule set governing the interactions between the government and population can vary significantly across countries. Based on the case study findings this article is able to formulate an initial hypothesis: SWFs of countries with parliamentary systems and high levels of political freedom are more likely to adopt ethical investment guidelines.

TheeCompetitiveness offCentral anddEastern European (CEE) Financial Markets

Although there has been vivid academic debate as to what extent Sovereign Wealth Funds (SWFs) are motivated by political reasons, it is rather clear that countries can use state-owned investment funds as a tool of their foreign policy. Even Barack Obama, during his initial presidential campaign in 2008 commented: “I am obviously concerned if these… sovereign wealth funds are motivated by more than just market consideration and that’s obviously a possibility”. This book looks at SWF activities in Central and Eastern Europe (CEE) to determine the main motives for SWF presence in CEE. Are the potential financial gains the only reason behind their investments? Are SWF activities in the region dangerous for the stability and security of the CEE countries? The book is pioneering analyses of SWFs behaviour in the region, based on empirical data collected from the Sovereign Wealth Fund Institute Transaction Database, arguably the most comprehensive and authoritative resource tracking SWF investment behaviour globally.

The Recent Investment Activity of Global Sovereign Wealth Funds

Although there has been vivid academic debate as to what extent Sovereign Wealth Funds (SWFs) are motivated by political reasons, it is rather clear that countries can use state-owned investment funds as a tool of their foreign policy. Even Barack Obama, during his initial presidential campaign in 2008 commented: “I am obviously concerned if these… sovereign wealth funds are motivated by more than just market consideration and that’s obviously a possibility”. This book looks at SWF activities in Central and Eastern Europe (CEE) to determine the main motives for SWF presence in CEE. Are the potential financial gains the only reason behind their investments? Are SWF activities in the region dangerous for the stability and security of the CEE countries? The book is pioneering analyses of SWFs behaviour in the region, based on empirical data collected from the Sovereign Wealth Fund Institute Transaction Database, arguably the most comprehensive and authoritative resource tracking SWF investment behaviour globally.

Sovereign Wealth Funds in Central and Eastern Europe: Scope and Methods of Financial Penetration

The Central and Eastern European (CEE) capital markets (of Poland, Lithuania, Latvia, Estonia, the Czech Republic, Slovakia, Hungary, Ukraine and, to a limited extent, Belarus) are gradually evolving towards increased breadth (diversity) and depth (liquidity), however, they are still exposed to considerable cross-country volatility and interdependence spill-overs – especially in times of capital flight to more established asset classes (“safe havens”). Sovereign Wealth Funds (SWFs) have widely been censured for their undesirable political interference and chronic operational opacity. This paper demonstrates that in CEE, contrary to widespread perceptions attributable to developed markets, SWFs can act as natural and powerful risk mitigators (contributing to a more stable capital base and reduced systemic volatility). Such a proposition is premised on several factors specific to SWFs oriented to CEE. They comprise: strategic long-termism and patience in overcoming interim pricing deficiencies, commitments to elements of a broadly interpreted infrastructure, and absence of overt conflicts of interest with the CEE host economies. The paper, besides reviewing the utilitarianism of SWFs in the CEE’s risk mitigation context, highlights regulatory and technical barriers to more SWF funding for CEE. It also recommends policy measures to the CEE economies aimed at luring more host-friendly SWF investment into the region.

Sovereign wealth fund investments and the US political process

We examine US firm-level campaign finance contributions preceding and subsequent to equity investment by a sovereign wealth fund (SWF). Our empirical results suggest that SWFs are attracted to firms engaged in US campaign finance and that firm campaign finance contributions increase after SWF investment. SWF attraction to campaign finance firms increases (1) after an exogenous legal shock that liberalized corporate campaign finance activities, and (2) in a subset of industries vulnerable to recent legislation capable of inhibiting or expunging foreign investment. We provide some of the first evidence consistent with political motives for SWF investment in the United States.

Financial Reporting Consequences of Sovereign Wealth Fund Investment

Sovereign wealth funds (SWFs), with $8 trillion in assets, are government-owned institutional investors pursuing political and financial investment objectives. I document evidence supporting the hypothesis that simultaneous pursuit of political and financial investment objectives renders SWFs weak monitors. Using a staggered difference-in-differences research design, I find that discretionary accruals increase by 0.31 percent of total assets 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. Reanalyses documenting that conventional institutional investment instead reduces discretionary accruals corroborate SWFs’ distinct monitoring effect. Robustness tests employing alternate specifications, samples, and financial reporting proxies further corroborate inferences regarding SWFs’ distinct monitoring role among institutional investors.

Sovereign wealth fund investments and the need to undertake socially responsible investment

There is an increasing consensus that, beyond financial returns, investors should also consider the environmental and social impacts of their business activities. Major institutional investors currently are entering the realm of socially responsible investment (SRI), which incorporates environmental, social, and governance (ESG) factors into decision-making based on internationally recognized standards and principles. As influential institutional investors, sovereign wealth funds (SWFs) have attracted attention worldwide and raised concerns from host countries. In this context, questions may arise, such as: Whether and why do SWFs need to undertake SRI? How to implement SRI strategies by SWFs? Can SWFs influence corporate performance through SRI? This paper analyses the impact of SWFs in the realm of SRI and clarifies relevant legal issues concerning SRI initiatives by SWFs. It first examines the rationale of SRI and the reasons to implement SRI from theoretical and practical perspectives. It then questio...

Overseas state outsiders as new sources of patient capital: Government policies to welcome Sovereign Wealth Fund investment in France and Germany

Strong debates in the varieties of capitalism literature as to whether financial liberalization and internationalization undermine ‘insider’ corporate governance systems based on patient capital in coordinated and state-led market economies have focused on ‘impatient’ overseas private capital. However, cross-border state investment has also grown. We examine government policies towards a prominent type of state investment—equity purchases by sovereign wealth funds (SWFs). We argue that policymakers in ‘insider’ corporate governance systems can see such investment as an attractive international source of patient capital to offset declines in traditional sources of patient capital. We compare Germany and France and show that policymakers actively welcome SWF investment. Policy is driven by coalitions of ‘insiders’ of the managements of large industrial firms and governments who seek passive patient capital and beneficial relationships with overseas investors. Thus, financial liberalization and internationalization can allow new sources of patient capital through overseas state investors.

Sovereign wealth funds investment effects on target firms' competitors

We investigate the impact of sovereign wealth funds acquisitions (SWFs) on the performance of target firms' competitors. We find a positive and significant impact of SWFs acquisitions on target firms' competitors. This means that market participants anticipate value creation in the targets competitors, due to likely expected restructuring activities. Further analysis shows that relatively large rivals, low leveraged rivals, rivals with highly correlated returns with those of their corresponding targets, rivals in less competitive industries show higher abnormal returns upon the acquisition announcement. Our results question the rationality of protectionism as legal barriers to sovereign wealth funds cross-border investments.

Sovereign Wealth Funds, Globalization of Capital Markets, and Internationalization Strategies

In this work, we study the strategies driving cross-border sovereign wealth fund (SWF) investments worldwide. In particular, we investigate how SWFs internationalize their activities, studying whether the use of investment vehicles as signal of passive investment approach to access foreign markets is influenced by SWF- and deal-specific characteristics and the presence of bilateral trade agreements between the SWF’s and the target country. We use a new dataset on SWF investments, whose size is comparable with the datasets used in the most popular SWF studies. Our probit and multinomial logit estimates show that fund opacity, fund politicization, strategic industry targets, and majority ownership choices lead to a more likely use of vehicles, while bilateral trade agreements negatively affect such investment strategy. When we disentangle the different types of vehicles and their geographical location, we find that fund opacity increases the likelihood to use SWF-controlled vehicles, while fund politicization, strategic industry targets, and majority ownership choices increase the likelihood to use a corporate vehicle. While, bilateral trade agreements reduce the use of corporate vehicles. As to the geographic location of the vehicle, politicized foreign SWFs are more likely to invest through vehicles located in third countries. Instead, targeting strategic industries leads to invest in vehicles located in the target country. Our results control for SWFs’ strategic goals, SWF experience (reliance on external managers or advisors, fund size), type of funding sources, crisis period, deal-specific effects, and legal and institutional differences across countries and over time.

Sovereign Wealth Fund investments in Europe as an instrument of Chinese energy policy

Chinese Sovereign Wealth Funds (SWFs) are new instruments of Chinese ‘Go Global’ strategy and the politics of maintaining raw materials and energy security. Europe has lured 60% of the total USD 27.3 billion invested by Chinese SWFs in the energy sector globally, which provokes the question as to how important SWF investments are in the political sense and what security concerns they bring. This paper is the first that presents a comprehensive picture of Chinese SWF investments in the European energy market and one of the very few papers about SWFs based on multiannual, comprehensive empirical data. The author argues that Chinese SWFs are different players on the energy market than private investors, could be potentially harmful for some European interests. By installing representatives on the company boards, China gains access to sensitive information that could be then transferred to Chinese competitors. Moreover, through its SWFs China could take control over energy companies or critical infrastructure and increase its political influence in European countries, making them more vulnerable to political pressure. Therefore, the European policy-makers should consider taking special steps to monitor and maybe limit Chinese SWFs expansion in the energy sector.

A Financial Force to Be Reckoned with? An Overview of Sovereign Wealth Funds

Sovereign Wealth Funds (SWFs) represent a new form of investment organizational structure and have grown to over $5.7 trillion assets under management by February 2016, making them a financial force potentially worth reckoning with in international financial markets. This article starts with a brief introduction of the 35 funds that meet our definition of SWFs, then discusses their evolution from stabilization funds to SWFs and illustrates the differences and similarities between the various types of funds. The most salient and controversial feature of SWFs is that they are state-owned; we survey the existing literature on state ownership and discuss what this predicts about the efficiency and beneficence of government control of SWF assets. We discuss the documented importance of SWF funding sources (oil sales revenues versus excess reserves from export earnings) and survey the normative literature describing how SWFs should allocate funds. We then summarize the empirical literature studying how SWFs actually do allocate funds across asset classes, geographically, and across industries. We document that most SWF equity investments in publicly traded firms involve cross-border purchases of sizeable minority stakes (median around 20%) in target firms. However, the most recent data shows a “shift to domestic investment” pattern and also an industry preference change from the financial to the real estate sector. Next, we assess empirical studies examining the impact of SWF stock investments on target firm financial and operating performance, and find universal support for a positive announcement period stock price increase of 1-3%. This, however, is significantly lower than the 5% abnormal return documented for stock purchases by comparable privately owned financial investors in recent studies, indicating a “sovereign wealth fund discount.” Finally, we point out the unresolved issues and possible extensions in SWF research, and assess how the massive decline in oil export revenues by major SWF sponsor nations such as Abu Dhabi, Russia, Kuwait, and Norway is likely to impact SWF investment levels in coming years.

Sovereign Fund Selling, Market Volatility and Systemic Risk: Connections and Regulatory Possibilities

Sovereign wealth funds (SWF) have largely proven to be the gentle giants of the financial markets; they tend to be relatively patient, passive shareholders. In contrast to other activist hedge funds, when SWFs do engage with companies, they tend to work behind the scenes to maximize value for the long term. And yet, because they are funds owned by a sovereign, they often receive significant scrutiny, especially in developed markets, whenever they invest. To date, most of this scrutiny has occurred on the front end of investments, as host-country politicians and regulators question the motives of SWF investment in their markets. In some cases this scrutiny proves to be strict enough to encourage SWFs to look for other opportunities in other markets. As SWFs have continued to invest responsibly and regulators have become increasingly comfortable with SWF investment, the fear-mongering associated with SWF investment has decreased. Now, however, concerns have arisen not over how SWFs invest, but how they divest. Indeed, some reports seem to attribute depressed stock market prices and general market volatility to SWF divestment. A headline in Barron’s, for example, claimed that “Selling by sovereign wealth funds is a huge headwind for stocks,” and a headline for an article in the Financial Times declared that “Sovereign wealth funds drive turbulent trading.” Undoubtedly withdrawals from some SWFs — particularly Gulf SWFs — have had an impact on the markets, and particularly on stocks in which SWFs tend to overweight in their portfolios, such as stock in financial firms and some consumer goods companies. Perhaps the biggest impact has been felt by asset managers, which have seen their AUM deteriorate as SWFs withdraw funds.But how significant are SWF withdrawals from markets? Put in a slightly more pointed way, do SWF withdrawals create systemic risk for the markets? And if they do, what could be done about it? This brief analysis, prepared for the Universita Bocconi's Sovereign Investment Lab 2016 Annual SWF Report, attempts to work towards an answer to those questions, and in doing so, also attempts to provide some perspective on the larger debate in the appropriate role of SWFs in global capital markets.

Sovereign Wealth Funds' Internationalization Strategies: The Use of Investment Vehicles

In this paper, we examine the strategies used by sovereign wealth fund (SWF) investments in their cross-border investments. We investigate how SWFs internationalize their activities, specifically whether the use of investment vehicles as signal of passive investment approach to access foreign markets is influenced by SWF- and deal-specific characteristics and the presence of bilateral trade agreements between the SWFs and the target country. Our probit and multinomial logit estimates show that fund opacity, fund politicization, strategic industry targets, and majority ownership choices lead to a more likely use of vehicles, while bilateral trade agreements negatively affect such investment strategy. We also find that fund opacity increases the likelihood to use SWF-controlled vehicles, while fund politicization, strategic industry targets, and majority ownership choices increase the likelihood to use a corporate vehicle. Bilateral trade agreements reduce the use of corporate vehicles. Our results also indicate that politicized foreign SWFs are more likely to invest through vehicles located in third countries. On the other hand, when strategic industries are targeted, investment vehicles are likely to be located in the target country. Our results control for SWFs' strategic goals, SWF experience (reliance on external managers or advisors, fund size), type of funding sources, crisis period, deal-specific effects, and legal and institutional differences across countries and over time.

Sovereign Wealth Funds (SWFs) in Central and Eastern Europe (CEE)

This chapter examines the CEE activity of SWFs from two perspectives: CEE-based SWFs operating internationally and CEE as hosts to international SWF investments. The scales of both activities are marginal in global terms, yet the SWF footprint can be significant in isolated CEE industries or investment targets. While new SWFs are unlikely to emerge in CEE, the scale of global SWF allocation to the region is set to expand in line with diversification and growth opportunities. CEE should strive to improve its investment climate, including competitiveness of financial industries. The existing CEE-based (Russian) SWFs would benefit from deregulation, transparency and commitment to performance metrics, yet they remain a hostage to the future shape of Russian and world macroeconomic policy.

A Political Menace or Commercial Opportunity? Chinese Sovereign Wealth Fundss Investments in the European Union

With an estimated total of US $1.2 trillion under management, the two top Chinese sovereign wealth funds (SWFs) are a force to be reckoned with globally. Thus far, their investment exposure to European assets (an average of US$4.0 billion annually in 2009-2013) has been insignificant and has not exhibited deliberate overemphasis on industries, activities or individual targets deemed particularly vulnerable from the socioeconomic or political perspective. Furthermore, country variations in the distribution of Chinese SWF investments across Europe lay bare more of a reflection on host country openness and local capital market competitiveness than a proactive bias on the part of the SWFs to under- or overweight particular economies. These findings, however soothing in the context of hinese SWF investment in the EU, do not obviate the need for a coordinated pan-EU strategy aimed at upgrading the transparency of inward investment by all SWFs (including Chinese) and actionable policy measures to suspend or repel investments whose motifs are unclear and might be detrimental socioeconomically and politically. On the other hand, the EU needs to work hard on improving its investment climate to attract more Chinese investment (also in the form of SWF capital injections). This study comes up with a compendium of potential steps that the EU might contemplate to militate against harmful practises adopted by individual SWFs and to promote general SWF transparency. The paper draws on empirical transaction statistics recorded under the Sovereign Wealth Fund Transaction Database reconciled with those of the SWF Center Transaction Database.

The Impact of the Chinese Sovereign Wealth Funds (SWFs) On Sino-EU Relations: The Leverage between Investment and Human Rights

Abstract Sovereign wealth funds (SWFs) have been rapidly redefining the traditional paradigms, providing both much-needed capitals as well as posing particular challenges for policy makers. The role of SWFs, which are becoming increasingly involved in the global financial markets, has often been underestimated in the discourse of the protection of human rights. The tâtonnement processes of bargaining between home and host countries of SWFs indicate that the concern regarding human rights has maintained a sensible balance between protecting the rights of individuals and the benefits that large capital investments offer for both host and home countries. The challenge still remains as to whether the presumption that the promotion of SWFs investment is going to retard the promotion of human rights would not be rebutted even in terms of the new global regulatory framework.

Sovereign Wealth Fund Investments and Stock Prices: The Effect of Target Industry and Location

In this work we investigate the determinants of sovereign wealth fund (SWF) investments’ stock prices. We focus on the location of the investment (domestic versus cross-border investments) and on the target industry (strategic versus non-strategic). We use a new dataset on SWF investments and stock prices, whose number of transactions is comparable with that used in the most popular SWF studies. To control for the endogeneity of the location and target industry choices, we use two identification strategies: an OLS estimation with residuals clustered at SWF country-level and SWF-specific fixed effects to control for the quality/experience of each fund, and an Instrumental Variables (IV) estimation. Our results show that on a 50-days window around the SWF investment, cross-border investments have an average higher increase in stock price than domestic SWF investments. While, on the same time window, SWF investments in strategic industries show an higher drop in stock price than SWF investments in non-strategic industries. We also find that the higher is the politicization of the fund, and the higher is the stock price drop. Our results are robust to controls for the presence of bilateral political relations between the SWFs’ and target country, fund type (SWFs vs. Sovereign Pension Reserve Funds), fund opacity, equity stake of the investment, the use of an investment vehicle, the target country’s market capitalization/GDP ratio, and time effects.