Working Paper: CEPR ID: DP6959
Authors: Vidhi Chhaochharia; Luc Laeven
Abstract: Sovereign wealth funds have emerged as an important investor of global equity, attracting growing attention. Despite concerns that sovereign wealth fund investments may serve political objectives and be in conflict with national interests, little is known about the investment objectives and performance of sovereign wealth funds. We collect new data on foreign equity investments by sovereign wealth funds. We find that sovereign wealth funds largely invest to diversify away from industries at home but that they do so predominantly in countries that share the same culture, suggesting their investment rules are not entirely driven by profit maximizing objectives. Share prices of firms respond favorably when sovereign investment funds acquire stakes, in part because these investments often take place when firms are in financial distress. However, the long-run performance of equity investments by sovereign wealth funds tends to be poor, consistent with imperfect portfolio diversification and poor corporate governance.
Keywords: Asset Allocation; Corporate Governance; Sovereign Wealth Funds
JEL Codes: G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Sovereign wealth funds tend to invest in countries that share similar cultural traits (F21) | Positive foreign equity bias towards countries with religious affinity (Z12) |
| SWF investments (G19) | Long-term performance is generally poor (G40) |
| Imperfect portfolio diversification and inadequate corporate governance (G39) | Long-term performance is generally poor (G40) |
| Announcement of SWF investments (G23) | Positive abnormal returns for the firms involved (G14) |
| SWF investments during periods of financial distress (G33) | Positive abnormal returns for the firms involved (G14) |