Friends or foes? Target selection decisions of sovereign wealth funds and their consequences

This paper examines investment strategies of sovereign wealth funds (SWFs), their effect on target firm valuation, and how both of these are related to SWF transparency. We find that SWFs prefer large and poorly performing firms facing financial difficulties. Their investments have a positive effect on target firms' stock prices around the announcement date but no substantial effect on firm performance and governance in the long run. We also find that transparent SWFs are more likely to invest in financially constrained firms and have a greater impact on target firm value than opaque SWFs. Overall, SWFs are similar to passive institutional investors in their preference for target characteristics and in their effect on target performance, and SWF transparency influences SWFs' investment activities and their impact on target firm value.     

The Impact of Sovereign Wealth Funds on Corporate Value and Performance

The last few years have seen a remarkable increase in the participation of sovereign wealth funds (SWFs) in global capital markets. In this article, the author draws on a unique dataset of SWF international holdings—one that dates back to the year 2002 and includes individual SWF holdings in more than 8,000 companies in 58 countries—to provide evidence of the impact of SWFs on corporate values and operating performance. Contrary to claims that SWFs expropriate minority investors and pursue political agendas, the main finding of the author's study is that SWF ownership is associated with positive changes in both corporate market values and operating returns. In support of these findings, the author also identifies three important ways that SWFs work to increase the performance and value of the companies they invest in: (1) as long‐term holders that provide a stable source of financing; (2) as representatives of deep pools of international capital in search of global diversification opportunities that are likely to provide companies with a lower‐cost (as well as more “patient”) source of equity capital; and (3) as politically well‐connected strategic investors that enable their companies to leverage important connections when accessing new product markets.     

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.     

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.     

The effect of sovereign wealth funds on the credit risk of their portfolio companies

We study how sovereign wealth fund (SWF) investments affect the credit risk of target companies as measured by the change in their credit default swap (CDS) spreads around the investment announcement. We find that the CDS spread of target companies decreases, on average, following an SWF investment. The reduction in the CDS spread is higher when the SWF is established by a politically stable non-democratic country that has a neutral political relationship with the host country of the target company. Our results suggest that creditors expect SWFs to protect target companies from bankruptcy when it is in the interest of their home country to build political goodwill in the host country of the company.     

Firm values and sovereign wealth fund investments

We analyze the impact of sovereign wealth fund (SWF) investments on firm values and provide evidence consistent with the tradeoff between the monitoring and lobbying benefits versus tunneling and expropriation costs of SWFs as blockholders. The data show significant positive (negative) returns to announcements of SWF investments (divestments). The returns are non-monotonic, first rising (falling) and then falling (rising) with the share sought (sold) for investments (divestments). Moreover, we find that SWFs are often active investors. Slightly more than half of the target firms experience one or more events indicative of SWF monitoring activity or influence.     

Does political risk matter for sovereign wealth funds? International evidence

We investigate the impact of political risk on the investment decisions of sovereign wealth funds (SWFs). Using an international sample of 302 targets involved in 427 SWFs' deals, we find that political risk matters in determining SWFs' portfolio strategies. Among the four dimensions of political risk, we show that conflicts and democratic tendencies are the main components that explain variations in SWF behaviour, whereas the quality of institutions and government action matter less. Our results are robust to a battery of sensitivity tests, alternative model specifications, subsample analysis, and cultural bias.     

Sovereign wealth funds: Past,present and future

In this article, we conduct a meta-literature review of sovereign wealth funds (SWFs), covering 184 articles from 2005 to 2019. Our meta-literature review consists of qualitative analysis of content using the NVivo software program and quantitative analyses of bibliometric citations using the HistCite and VOSviewer software programs. We identify three main research streams: (i) the overview and growth of SWFs, (ii) governance and political concerns regarding SWFs, and (iii) the investment strategies of SWFs. We identify the most influential aspects of the SWF literature, such as the leading countries, institutions, journals, authors, and articles. Finally, we propose 20 research questions based on the meta-literature review of sovereign wealth funds to set the future research agenda.     

Sovereign Wealth Funds: A Growing Global Force in Corporate Finance

Sovereign wealth funds (SWFs) have emerged as among the most important players in global financial markets. With an estimated $3 trillion at present, the collective assets at their disposal are expected to reach or surpass $7.5 trillion by 2012. SWFs have shown a wide range of investment objectives, along with continually evolving time horizons and risk appetites. For example, some SWFs have become increasingly active in corporate acquisitions and other strategic transactions. Though many of these funds prefer to invest in debt or non‐controlling equity positions, a small but growing number are seeking substantial minority and controlling equity stakes. SWFs have also recently become major participants in the financial institutions and alternative investment industries, with several high profile investments in well‐known private equity firms and financial services companies. In certain corporate transactions, their longer time horizons and willingness to employ larger percentages of equity have made them attractive alternatives to established private equity. At the same time, however, the rising prominence and perceived lack of transparency of SWFs have raised concerns among governments and other market participants in countries where companies have been targeted for investment. For this reason, companies intent on obtaining funding from or investing with SWFs are advised to prepare for media and regulatory scrutiny, particularly if a transaction is perceived to involve a country's strategic or security interests. Government policymakers are urged to balance the perceived threats of SWFs against their potential benefits, particularly their ability to provide a stabilizing source of global liquidity in the current economic environment.     

Determinants of Sovereign Wealth Fund Cross‐Border Investments

Using a sample of 1,590 purchases of stock by sovereign wealth funds (SWFs) in listed firms in 78 target countries between 1985 and 2011, we study the country‐level determinants of SWF cross‐border investment. We find that SWFs from countries with high levels of openness and economic development, but with less developed local capital markets, will make more cross‐country transactions, while target countries with higher levels of investor protection and more developed capital markets will attract more SWF investment. Our findings support the investment facilitation hypothesis, suggesting that SWFs act purely or principally as commercial investors facilitating cross‐border corporate investment.     

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.     

Sovereign pension and social security reserve funds: A portfolio analysis

Sovereign wealth funds (SWFs) have been increasing in numbers and in the global reach of their investment activities. At the same time, they seem to experience the adverse consequences of the financial crisis differently than other financial intermediaries. This paper assesses whether and how a retirement-financing purpose has affected their investment strategies since the global financial crisis, as opposed to the strategies of other public pension entities that do not operate as SWFs. We construct a sample of 12 sovereign pension reserve funds (SPRFs) and social security reserve funds (SSRFs) and analyze the effects of size, operational model, country development, the fund's experience, and quality of disclosures on strategic asset allocation for the period 2007–2014. We also investigate the relevance of “home bias.” Our results show that SPRFs invest more aggressively than SSRFs, but are less exposed to domestic investments. We do not find major shifts in asset allocation induced by the financial crisis, except for a recent decrease of home-country exposures.     

论主权财富基金信息披露法律规制及对中投公司的借鉴意义

主权财富基金(简称SWFs)是近年来兴起的跨国间新型投资形式。因其主权性、投资运作信息的不透明性,西方国家高度关注并采取相应的金融保护措施予以限制。因此,SWFs相对透明的信息披露法律规制有助于缓和母国与东道国之间的紧张对立。实践中,从各国国内立法到国际货币基金组织制定的信息披露规则等措施一定程度上减弱了SWFs的主权性色彩,促进了主权财富基金商业化运作,并有利于国际金融秩序的稳定。这对完善中投公司信息披露法律规制,争取良好的国际投资环境具有重要的借鉴意义。     

The effect of sovereign wealth funds on corporations: Evidence of cash policies in Singapore

This paper studies the monitoring role of sovereign wealth funds (SWFs). By using unique dataset from one of the largest SWF: Temasek holdings, we find that SWF’s presence has a positive effect on cash holdings of portfolio companies. The effect is more pronounced for well-governed firms, indicating that Temasek increases corporate cash holdings through its active role in corporate governance. We further find supportive evidence that Temasek ownership affects cash holdings by hoarding excess cash and reducing capital expenditure, especially within firms with good governance. Temasek’s discerning effect on cash policies highlights the effective monitoring role of sovereign wealth funds.     

Is local bias a cross-border phenomenon? Evidence from individual investors’ international asset allocation

Extant literature consistently documents that investors tilt their domestic equity portfolios towards regionally close stocks (local bias). We hypothesize that individual investors’ local bias is not limited to the domestic sphere but instead also determines their international investment decisions. Our results confirm the presence of a cross-border local bias. Specifically, we show (i) that the stockholdings of individual investors living within regional proximity to a foreign country display a significantly lower foreign investment bias towards investment opportunities in that country and (ii) that this drop in foreign investment bias levels is disproportionately driven by investments in regionally close neighbor-country companies. The impact of cross-border local bias on investors’ bilateral foreign equity investments is economically significant and holds even after controlling for previously identified explanations of international asset allocation.     

Economic freedom and cross-border venture capital performance

We investigate the determinants of cross-border venture capital (VC) performance using a large sample of 10,205 cross-border VC investments by 1906 foreign VC firms (VCs) in 6535 domestic portfolio companies. We focus on the impact of a domestic country's economic freedom on the performance of both VC investments and portfolio companies using a probit model and the Cox hazard model. After controlling for other related factors of domestic countries, portfolio companies, VCs and the global VC market, as well as year and industry fixed effects, we find that a domestic country's economic freedom is crucial to cross-border VC performance. In particular, in a more economically free country, as measured by the raw values of, quartiles of or the ranking in the index of economic freedom (IEF), a foreign VC-backed portfolio company is more likely to pull off a successful exit through an IPO (initial public offering) or an M&A (merger and acquisition), and a foreign VC firm is likely to spend a shorter investment duration in the portfolio company. We also identify interesting evidence on the impact of many other level factors of domestic countries, portfolio companies, VCs and the global VC market on cross-border VC performance.     

Cross-border venture capital performance: Evidence from China

This paper investigates the determinants of cross-border venture capital (VC) performance in the Chinese VC market. We focus on the impact of foreign VC firms' (VCs') human capital and domestic entrepreneurs' experience on the performance of both VC investments and portfolio companies using logit and Cox hazard models. After controlling for portfolio company quality, domestic VC industry development, domestic exit conditions and a number of other factors, little correlation was evident between VC performance and foreign VCs' human capital, such as experience, networks and reputation. In contrast, the domestic entrepreneurs' experience is crucial to VC performance. In particular, if an entrepreneur has more general experience in terms of the number of companies previously worked for or more special experience in terms of the number of companies previously served as a CEO or top manager, a portfolio company is more likely to pull off a successful exit through IPO or M&A, and the VCs are also likely to shorten their investment duration in the portfolio company.     

Economic policy uncertainty and cross-border lending

Banks increase cross-border syndicated lending when domestic economic policy uncertainty is high, after controlling for credit demand at the borrower country or country-industry levels. The credit migration effects are strongest for banks with diverse income and when banks face fiercer competition. Using elections as a source of plausibly exogenous variation which positively affects political uncertainty, we provide causal evidence on the effects of political uncertainty on cross-border lending. In countries with exogenous election timings, banks increase cross-border lending during the election period, especially when elections are closely fought. Compared to the extant literature, which extensively documents the negative effect of uncertainty on real investment, our findings show that uncertainty affects investments in financial assets differently.     

Credit policy and its heterogeneous effects on green innovations

We use the issuance of a new credit policy in China—the Green Credit Guideline (Guideline)—as a unique event and investigate its heterogenous effects on various green technology innovations for different firms in the world’s largest emerging economy. We find that all firms experience a significant increase in green technology innovations after the issuance of the Guideline. Companies with more considerable legitimacy deficiency in environmental compliance are more responsive to the Guideline. The larger increase in green technology innovations for companies with more legitimacy deficiency in environmental compliance is mainly driven by their higher productivity in applicational technology innovations after the Guideline was issued. All firms experience significant improvements in the effectiveness of investments, which is an important channel for increasing green technology innovations. Local legal system development and law enforcement efforts, firms’ political connections, and state ownership are essential mediating factors for green technology innovations, especially for firms with more legitimacy deficiency in environmental compliance. The Guideline positively affects both firm value and reputation, indicating that the new credit policy promotes impact investing.     

Compensation peer crash risks and corporate own investments: New evidences from U.S. stock markets

This study, employing US listed firms with compensation peer disclosures, investigates the impact of compensation and industry peer stock price crash risks on firms' own investments. We document three new evidences in the examination. First, we find that firms' own investments are positively affected by compensation peer crash risks but not industry peers. Second, we show that firms' own investments are explained by compensation peer crash risks only. Third, we demonstrate that the compensation peer crash risks and firms' own investments relation is positively moderated by corporate governance. Besides, additional analysis suggests that peers' incentive effect is a possible explanation to the positive compensation peer crash risks and firms' own investments relation.