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The purpose of this paper is to examine the propensity of sovereign wealth funds (SWFs) for shareholder activism and their potential impact on corporate governance.
Abstract
Purpose
The purpose of this paper is to examine the propensity of sovereign wealth funds (SWFs) for shareholder activism and their potential impact on corporate governance.
Design/methodology/approach
The study highlights the relationships between SWFs and corporate governance and also applies eight antecedents/determinants of institutional activism to analyze whether SWFs have a predisposition for shareholder activism.
Findings
The study only finds two instances of SWF activism. Additionally, it finds that despite their mostly passive investments, SWFs possess a natural tendency toward shareholder activism. Some are more likely to engage in activism than others, however. SWFs with a higher proportion of their assets invested in equities, those with portfolios fully or partially constructed to emulate the broader financial markets through indexing, and those that depend less on external fund managers are the likeliest candidates for activism. The study also finds that the regulatory environment can curb the natural SWF inclination for activist behavior.
Research limitations/implications
Due to the lack of transparency within the SWF universe, this study largely depends on the limited data available for sovereign wealth funds.
Practical implications
Given the growing importance of SWFs, managers, directors, and policymakers must assess SWF activism, its influence on corporate governance, and its implications for public policy deliberations.
Originality/value
This project, to the best of the author's knowledge, is the first study that applies tested financial models to SWFs in order to determine if they have inherent activist tendencies.
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Rolando Avendaño and Javier Santiso
Purpose – To study the allocation in equity markets of sovereign wealth funds’ (SWF) investments with respect to other institutional investors. To analyze the role of political…
Abstract
Purpose – To study the allocation in equity markets of sovereign wealth funds’ (SWF) investments with respect to other institutional investors. To analyze the role of political regimes in the sending and recipient countries as a determinant of the allocation of SWF investments.
Methodology/approach – We use mutual funds’ investments as a benchmark for SWF investment allocations. We collect data of SWF and mutual fund equity investments at the firm level and analyse them on a geographical and sector basis. We compare target investments for these two groups by looking at the political regime in the sending and recipient country, using different political indicators (Polity IV, Bertelsmann). We provide a comparison of SWFs and pension funds based on governance features related to investment.
Findings – We find that the fear that sovereigns with political motivations use their financial power to secure large stakes in OECD countries is not confirmed by the data. SWF investment decisions do not differ greatly from those of other wealth managers. Although there can be differences in the allocation, political regimes in the recipient countries do not play a role in explaining the allocation of sovereign wealth funds.
Social implications – Investment from public institutions, such as sovereign wealth funds, can have significant implications at the economic and social level. Sovereign funds are potential sources of capital for emerging economies, and therefore can enchance economic growth. It is important to understand to what extent public institutional investors behave differently from private investors. The “political bias” is not a relevant factor for sovereign funds, or for other institutional investors, for allocating their capital. More often than not, their asset allocation strategies converge with other large investors, these being driven by financial and not political bias.
Originality/value of the chapter – The chapter is an original contribution providing a firm-level analysis of equity holdings for two groups of institutional investors. Moreover, it emphasizes the political dimension of institutional investments, highlighting the priorities and constraints of public investors participating in financial markets. The chapter suggests that SWFs do not discriminate by the political regime of the recipient country in their asset allocation.
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Narjess Boubakri, Jean-Claude Cosset and Nabil Samir
Purpose – Run a comparative analysis between investments of sovereign wealth funds (SWFs) and mutual funds, focusing on firm-level, country-level, and institutional…
Abstract
Purpose – Run a comparative analysis between investments of sovereign wealth funds (SWFs) and mutual funds, focusing on firm-level, country-level, and institutional variables.
Methodology/approach – We use a hand-collected sample of 1,845 acquisitions around the world over the last 25 years (251 for SWFs and 1,594 for mutual funds). We then run univariate parametric and nonparametric tests to assess the differences in the investments of both subsamples.
Findings – We review the literature on the determinants of SWFs' investment decisions. Our analysis adds to the scarce available literature on the investment decisions of SWFs and their comparison with other institutional investors. Our results show that, compared to mutual funds, SWFs indeed exhibit different preferences: for instance, SWFs prefer to acquire stakes in larger, less liquid companies which are financially distressed but which also have a higher level of growth opportunities. They also prefer less innovative firms with more concentrated ownership, which are located in less developed but geographically closer countries with whom they do not necessarily share cultural and religious backgrounds.
Social implications – Our results are important for practitioners and firms seeking to attract a given type of institutional investment. They also add insights to the debate on the “hidden” political objectives behind SWF investments in the Western world.
Originality/value of paper – This is the first attempt to empirically assess the differences in the investment choices of SWFs and mutual funds.
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Manar Lootah, Kimberly Gleason, Deborah Smith and Taisier Zoubi
The purpose of this paper is to examine failures in internal and external controls associated with sovereign wealth funds (SWFs), using three caselets to illustrate the fraud…
Abstract
Purpose
The purpose of this paper is to examine failures in internal and external controls associated with sovereign wealth funds (SWFs), using three caselets to illustrate the fraud triangle theory factors.
Design/methodology/approach
This study uses a qualitative research approach. Caselets are used to illustrate the fraud triangle factors associated with SWFs.
Findings
Ideally, SWFs would be characterized by opacity and the strategic flexibility to advance political goals, but this operational agility facilitates an environment ripe for fraud, in large part because there is little transparency with regard to their regulatory structure. Elements of the fraud triangle inherent in the structure of SWFs contribute to the fraud found in the three case examples.
Research limitations/implications
The authors use three SWF fraud cases rather than statistical sampling of all SWFs, which limits the generalizability of the findings. Future research should explore additional recommendations for the evaluation of SWF governance.
Practical implications
The overlap between public sector governance and SWF governance creates an environment amenable to fraud, and as a result, fraud has occurred in several SWFs. Governance recommendations should take into account the lessons learned from previous SWF fraud cases.
Social implications
Ideally, SWFs would be characterized by opacity and the strategic flexibility to advance political goals, but this operational agility may also facilitate an environment ripe for fraud, in large part because there is little transparency with regard to their regulatory structure.
Originality/value
To the best of the authors’ knowledge, this paper is the first to identify the fraud triangle risk factors associated with sovereign wealth funds using SWF fraud caselets.
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This paper aims to investigate the idea of building responsible borrowing and lending into sovereign wealth fund (SWF) decision-making. SWFs, which currently manage US$8 trillion…
Abstract
Purpose
This paper aims to investigate the idea of building responsible borrowing and lending into sovereign wealth fund (SWF) decision-making. SWFs, which currently manage US$8 trillion in assets, are influential institutional investors, but their role in sovereign debt markets needs to be further explored. In this context, this paper aims to critically assess the linkages and convergences between the Santiago Principles on SWF and the United Nations Conference on Trade and Development (UNCTAD) principles on responsible sovereign lending and borrowing.
Design/methodology/approach
This paper draws on legal scholarship, reports, policy papers and other open-source data to explore the role of SWFs in sovereign lending, borrowing and debt restructuring.
Findings
Building responsible borrowing and lending into SWF decision-making is feasible and justified on the grounds of both ethics and public duty. It is also justified in financial terms because it would protect SWFs from irresponsible lending and borrowing practices at the micro level while contributing to global financial stability at the macro level.
Originality/value
This is the first comprehensive study to juxtapose two important normative processes, the Santiago Principles and the UNCTAD Principles.
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Abdulaziz K. Alosaimi and Mishari M. Alfraih
The purpose of this paper is to explore and evaluate the main segments of existing empirical literature related to Sovereign Wealth Funds (SWFs) and provide a thorough…
Abstract
Purpose
The purpose of this paper is to explore and evaluate the main segments of existing empirical literature related to Sovereign Wealth Funds (SWFs) and provide a thorough investigation of their research questions, theoretical frameworks, data selections and research methodologies.
Design/methodology/approach
The literature on SWFs has been split into three main streams: qualitative studies with theoretical contributions aiming to conceptualize the phenomenon of SWFs; normative assessments of the optimal asset allocations of SWFs; and empirical works that aim to investigate different perspectives of SWFs. The paper attempts to review the state of existing literature relating to these areas by answering specific questions.
Findings
Despite their significant size and potential impact, the literature on SWFs seems to be still in its infancy. The paper collects insights from previous literature, addresses its difficulties and challenges.
Research limitations/implications
The characteristics of the previous empirical literature and the challenges facing this line of research offer an insightful thought for the future research works in this topic.
Originality/value
The paper offers a thorough assessment of the existing empirical research on SWFs and shade some light on the techniques and procedures used.
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Salman Bahoo, M. Kabir Hassan, Andrea Paltrinieri and Ashraf Khan
The purpose of this paper is to propose a model of the Islamic sovereign wealth funds (ISWFs) based on Islamic finance principles to modify the precarious image of SWFs from…
Abstract
Purpose
The purpose of this paper is to propose a model of the Islamic sovereign wealth funds (ISWFs) based on Islamic finance principles to modify the precarious image of SWFs from Muslim countries. The Shariah laws are the cardinal direction for this study.
Design/methodology/approach
The authors applied a qualitative research technique that consists of three approaches: exploratory case study approach to critically examine and rank the existing status of SWFs; descriptive analysis; and content analysis to present a model of ISWFs in comparison of conventional SWFs.
Findings
The authors propose a model of the “Islamic Sovereign Wealth Funds” based on four key pillars: the major Shariah principles; the Islamic corporate governance framework; the Islamic transparency and disclosure framework; and the Islamic corporate social responsibility framework. Furthermore, the authors argue that the potential effect of the ISWFs on Islamic finance and economy will be positive.
Research limitations/implications
The model is an initial work and idea to convert SWFs from Muslim countries into ISWFs, which required an in-depth policy review by governments.
Practical implications
The findings of the paper are useful for policymakers and governments of the Muslim countries to overcome the issues and criticism on SWFs by converting them in ISWFs.
Originality/value
This paper contributes to the literature related to Islamic finance and sovereign wealth fund by presenting a first model of ISWFs for Muslim countries.
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This paper aims to systematically review all available evidence on the implications of sovereign wealth funds (SWFs) for various stakeholders (recipients of sovereign investment…
Abstract
Purpose
This paper aims to systematically review all available evidence on the implications of sovereign wealth funds (SWFs) for various stakeholders (recipients of sovereign investment, home countries, which incorporate SWFs and the world at large) and offer future research directions.
Design/methodology/approach
A systematic literature review (SLR) technique is used to review 102 handpicked articles for the period 2005‐2019.
Findings
This review reveals that the literature on the impact of SWFs emerged only during the financial crisis of 2008–2011 and much of it is qualitative in nature. The literature is lopsidedly focused on the impact of SWFs on target firms and there has been a limited empirical investigation of the impact on other stakeholders. There is a lack of consensus in several areas, which calls for additional research. Few areas, which have not been addressed in the literature and can be taken up by future researchers include the impact of SWFs on macroeconomic fundamentals and stock markets of recipient countries, especially emerging economies; implications of SWFs for alternative asset classes; impact on the welfare of citizens and internationalization strategies of home countries; impact on initial public offerings and unlisted corporations; and impact on innovativeness, efficiency and corporate governance practices of target firms.
Originality/value
To the best of the authors’ knowledge, this is the first paper to use the SLR technique to review the literature on SWFs. It considers the impact of SWFs on all stakeholders and covers both qualitative and quantitative literature published over a long period of 2005‐2019. It also systematizes all available evidence on this theme and identifies important research gaps, which may be helpful for academicians, practitioners and policymakers.
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Sivakumar Velayutham and Rashedul Hasan
The purpose of this paper is to critically discuss the participation of sovereign wealth funds (SWFs) in the corporate social responsibility (CSR) programmes. Sovereign wealth…
Abstract
Purpose
The purpose of this paper is to critically discuss the participation of sovereign wealth funds (SWFs) in the corporate social responsibility (CSR) programmes. Sovereign wealth funds in emerging economies are often involved in corporate social responsibility. However, the 1 Malaysian Development Berhad (1MDB) scandal illustrates the possible use of SWF as a vehicle for corruption and abuse.
Design/methodology/approach
The primary objective is to develop good governance practices of CSR by SWFs that could limit corrupt practices. A case study approach is adopted to investigate the CSR involvement of two SWFs – Norway’s Government Pension Fund Global (GPFG) and Abu Dhabi Fund for Development (ADFD).
Findings
The finding shows that SWFs should not be directly involved in CSR. It is proposed that independent Non-government Organisations (NGOs), through a competitive funding model, could serve the CSR purpose of SWFs more effectively and bring socio-economic changes in emerging economies.
Originality/value
The funding model identifies the expected outcomes, priorities and uses of the funds. The funding committee should also be independent of the Board and transparent in its allocations.
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Over the last two decades global cross‐border investment has increased. State‐owned and managed, sovereign‐wealth funds (SWFs), largely from the emerging‐market economies, have…
Abstract
Purpose
Over the last two decades global cross‐border investment has increased. State‐owned and managed, sovereign‐wealth funds (SWFs), largely from the emerging‐market economies, have started playing a decisive role in underpinning, sustaining and expanding financial globalization. This paper aims to provide the reader with basic conceptual strands on the SWF, their genesis, coming into prime and recent spurt in their operations.
Design/methodology/approach
The paper focuses on defining SWFs and tracks their origin and growth. It explores the present and future market size of SWFs and examines the ramifications of this group of large institutional investors. It also answers the query whether anxieties about their operations are exaggerated and attempts to provide answers regarding some of the prickly policy questions.
Findings
The paper finds that, although they are an instrument of enhancing liquidity and financial resource allocation in the international capital market, they have become a source of controversies and threaten and escalation in financial protectionism.
Originality/value
The paper focuses on the concept of SWFs and the recent spurt in their activities and significance.
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