Bilateral political relations and sovereign wealth fund investment

We examine the role of bilateral political relations in sovereign wealth fund (SWF) investment decisions. Our empirical results suggest that political relations play a role in SWF decision making. Contrary to predictions based on the FDI and political relations literature, we find that relative to nations in which they do not invest, SWFs prefer to invest in nations with which they have weaker political relations. Using a two-stage Cragg model, we find that political relations are an important factor in where SWFs invest but matter less in determining how much to invest. Inconsistent with the FDI and political relations literature, these results suggest that SWFs behave differently than rational investors who maximize return while minimizing risk. Consistent with the trade and political relations literature, we find that SWF investment has a positive (negative) impact for relatively closed (open) countries. Our results suggest that SWFs use—at least partially—non-financial motives in investment decisions.     

Diversification Bias and the Law of One Price: An Experiment on Index Mutual Funds

Individual investors select high-fee index mutual funds despite the fact that the future payouts are nearly identical. The authors offer an explanation for this violation of the law of one price based on investor desire to diversify. While diversification in some settings may be beneficial, in the case of assets with identical payouts, fee minimization is the only rational strategy. The evidence confirms that investors diversify by selecting multiple higher fee funds rather than minimizing fees when investing in index mutual funds.     

Fire sale acquisitions: Myth vs. reality

We provide empirical evidence on the conjecture that in economic crises, firms could be forced to sell at deep discounts, or fire sale prices. Using the conventional stock price near the announcement date, we find instead distressed firms in crisis periods receive a 30% higher offer premium than distressed firms in normal periods; they also receive a 34% higher premium than non-distressed firms in crisis periods. Acquirers also do not gain, at announcement and over the long-term. Acquirers, however, may perceive they realize fire sale discounts if the reference is the targets’ highest price in the previous 52 weeks.     

Sovereign wealth fund investment and the return-to-risk performance of target firms

This paper investigates the relationship between sovereign wealth fund (SWF) investment and the return-to-risk performance of target firms. Specifically, we find that target firm raw returns decline following SWF investment. Though risk also declines following SWF investment, we find that SWF investment is associated with a reduction in the compensation of risk over the 5 years following acquisition. Firm volatility decomposition suggests that idiosyncratic risk is what mainly drives these impacts toward decline. Employing a multinomial logit framework wherein combinations of target returns and risk movements are categorized, we see that, in cases of foreign investment, SWFs’ target firm performance most closely resembles that of other government-owned firms. The observed results are inconsistent with predictions of higher volatility and improved returns due to monitoring firm activities from the institutional investor literature. This suggests that SWFs may not provide some of the benefits that are offered by other institutional investors.     

Determinants of Foreign Versus Domestic Real Estate Investment: Property Level Evidence from Listed Real Estate Investment Firms

We examine the determinants of foreign real estate investment relative to the domestic case using the portfolios of a large sample of publicly traded real estate investment companies; where foreign investment is defined as the property owner headquarters being located in a different country than a given asset. The cross-sectional results provide strong evidence that real estate firms are more likely to take a smaller stake in larger assets when investing abroad. The penchant for large assets holds when controlling for economic activity, real estate investment opportunities, depth and sophistication of the capital markets, investor protection and the legal framework, administrative burdens and regulatory limitations, and the socio-cultural and political environment at both the property nation and headquarter nation levels. In general, foreign ownership is less likely with industrial, office, retail, and self-storage properties. Capital market development is consistently negatively related to foreign investment.     

Are Government Owned Investment Funds Created Equal? Evidence from Sovereign Wealth Fund Real Estate Acquisitions

The Journal of Real Estate Finance and Economics - Sovereign Wealth Funds (SWFs) are an institutional investor class about which relatively little is known. Even though they have trillions of...     

Idiosyncratic Volatility and Firm‐Specific News: Beyond Limited Arbitrage

We examine the relation between idiosyncratic volatility and returns around news announcements. Mispricing is most likely to occur during news announcements. If idiosyncratic volatility generates a limit to arbitrage, then the negative relation between returns and news volatility should be stronger than the relation to nonnews volatility. Instead, we find nonnews volatility has a robust negative relation to returns and lacks key features expected if volatility were a reflection of limits to arbitrage. Pricing of nonnews volatility is related to lottery‐like features of a stock's return. Our results suggest that volatility has a price effect beyond a limit to arbitrage.     

VIX changes and derivative returns on FOMC meeting days

We examine the link between scheduled Federal Open Market Committee (FOMC) meetings and the VIX measure. Our results indicate that VIX declines significantly on scheduled meeting dates. Unlike prior studies suggesting that the drop in VIX is mechanical, we attribute the decline to the resolution of uncertainty regarding future interest rates provided by the meetings. We examine returns to investable positions on VIX. Though a decline in the VIX level commonly occurs on FOMC meeting dates, we find that significant returns may still be garnered from taking short-VIX positions in derivative markets, even after accounting for the bid-ask spread.