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

54 Pages Posted: 4 Sep 2016

See all articles by Veljko Fotak

Veljko Fotak

State of New York (SUNY) at Buffalo; Bocconi University - BAFFI Center on International Markets, Money, and Regulation

Xuechen Gao

University of Oklahoma - Michael F. Price College of Business

William L. Megginson

University of Oklahoma

Date Written: August 2016

Abstract

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.

Keywords: Sovereign wealth funds, International financial markets, Government policy and regulation

JEL Classification: G32, G15, G38

Suggested Citation

Fotak, Veljko and Gao, Xuechen and Megginson, William L., A Financial Force to Be Reckoned with? An Overview of Sovereign Wealth Funds (August 2016). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 476/2016. Available at SSRN: https://ssrn.com/abstract=2825928 or http://dx.doi.org/10.2139/ssrn.2825928

Veljko Fotak

State of New York (SUNY) at Buffalo ( email )

School of Management, University at Buffalo
236 Jacobs Management Center
Buffalo, NY 14260
United States
+1 716-645-1541 (Phone)

Bocconi University - BAFFI Center on International Markets, Money, and Regulation ( email )

Milano, 20136
Italy

Xuechen Gao

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

William L. Megginson (Contact Author)

University of Oklahoma ( email )

307 W Brooks, 205A Adams Hall
Norman, OK 73019
United States
(405) 325-2058 (Phone)
(405) 325-1957 (Fax)

HOME PAGE: http://faculty-staff.ou.edu/M/William.L.Megginson-

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