Sovereign Wealth Funds’ Investment Purpose and the Investment Implications

Abstract

This paper examines sovereign wealth fund (SWF) equity investments in publicly traded firms according to a SWF’s investment purpose and home country political regime. Savings funds focus on long-term value creation; foreign exchange reserve funds focus on reducing the negative carry costs of holding reserves or earning higher returns on excess reserves. The results indicate savings funds located in an authoritarian regime are more activist, their targets experience a positive short-term market reaction but the performance of their targets over the subsequent three years varies depending on the performance metric used.

Keywords: Sovereign wealth funds, Cross-border investment, Firm value

JEL Classification: G32, G15, G38