Journal of Korea Trade

Korea Trade Research Association (한국무역학회)
권호 표지
DOI QR코드

DOI QR Code

Why do Sovereign Wealth Funds Invest in Asia?

  • Zhang, Hongxia (School of Economics, Shandong Normal University) ;
  • Kim, Heeho (School of Economics and Trade, Kyungpook National University)
  • Received : 2020.09.11
  • Accepted : 2021.01.25
  • Published : 2021.02.28
Download PDF
⟨ Previous Next ⟩

Abstract

Purpose - This paper aims to examine the determinants of SWFs' investment in Asian countries and to identify consistent investment patterns of SWFs in specific target firms from Asia, particularly China and South Korea. Design/methodology - This study extends the Tobin's Q model to examine the relationship between SWF investments in target firms and their returns with other firm-level control variables. We collect consistent data on SWF investments and the matched firm-level data on target firms, which of observation is 1,512 firms (333 in South Korea and 1,179 in China) targeted by 20 SWF sources during 1997-2017. The panel random effect model is used to estimate the extended Tobin's Q model. The robustness of the estimations is tested by the simultaneous equation models and the panel GEE model. Findings - The evidence shows that sovereign wealth funds are more inclined to invest in the financial sector with a monopoly position and in large firms with higher growth opportunity and superior cash asset ratios in China. In contrast to their investments in China, sovereign wealth funds in South Korea prefer to invest in strategic sectors, such as energy and information technology, and in large firms with high performance and low leverage. Sovereign wealth funds' investments tend to significantly improve the target firm's performance measured by sales growth and returns in both Korea and China. Originality/value - The existing literature focuses on examining the determination of SWFs investment in the developed countries, such as Europe and the United States. Our paper contributes to the literature in three ways; first, we analyzes case studies of SWF investments in Asian markets, which are less developed and riskier. Second, we examine whether the determination of SWF investment in Asian target firms depends on the different time periods, on types of sources of SWFs, and on acquiring countries. Third, our research uses vast sample data on target firms in longer time periods (1997-2017) than other previous studies on the SWFs for Asian markets.

Keywords

References

  1. Aggarwal, R., L. F. Klapper and P. D. Wysocki (2005), "Portfolio Preferences of Foreign Institutional Investors", Journal of Bank & Finance, 29(12), 2919-2946. https://doi.org/10.1016/j.jbankfin.2004.09.008
  2. Aguilera, R. V., J. Capape and J. Santiso (2016), "Sovereign Wealth Funds: A Strategic Governance View", Academy of Management Perspectives, 30(1), 5-23. https://doi.org/10.5465/amp.2013.0055
  3. Aizenman, J. and R. Glick (2009), "Sovereign Wealth Funds: Stylized Facts about Their Determinants and Governance", International Finance, 12(3), 351-386. https://doi.org/10.1111/j.1468-2362.2009.01249.x
  4. Amar, J., B. Candelon, C. Lecourt and Z. Xun (2019), "Country Factors and the Investment Decision-Making Process of Sovereign Wealth Funds", Economic Modelling, 80, 34-48. https://doi.org/10.1016/j.econmod.2018.04.008
  5. Avendano, R. (2010), Sovereign Wealth Fund Investment: From Firm-Level Preferences to Natural Endowments (Paris School of Economics Working Paper). Available from https://pdfs.semanticscholar.org/3062/a595789f7e1517a49774160d82f06d2e63b0.pdf
  6. Bahgat, G. (2010), "Sovereign Wealth Funds: An Assessment", Global Policy, 1(2), 162-171. https://doi.org/10.1111/j.1758-5899.2010.00008.x
  7. Bank of Korea. Available from http://ecos.bok.or.kr/.
  8. Beck, R. and M. Fidora (2008), The Impact of Sovereign Wealth Funds on Global Financial Markets (European Central Bank Occasional Paper, No. 91). Available from https://www.econstor.eu/bitstream/10419/154544/1/ecbop091.pdf
  9. Bernstein, S., J. Lerner and A. Schoar (2013), "The Investment Strategies of Sovereign Wealth Funds", Journal of Economic Perspective, 27(2), 219-238. https://doi.org/10.1257/jep.27.2.219
  10. Bortolotti, B., V. Fotak, W. L. Megginson and W. Miracky (2010), Sovereign Wealth Fund Investment Patterns and Performance (Feem Working Paper). Available from https://www.feem.it/m/publications_pages/2010421511422-09.pdf
  11. Bortolotti, B, V. Fotak and W. L. Megginson (2015), "The Sovereign Wealth Fund Discount: Evidence from Public Equity Investments", Review of Financial Studies, 28(11), 2993-3035. https://doi.org/10.1093/rfs/hhv036
  12. Boubakri, N., J. C. Cosset and J. Grira (2016), "Sovereign Wealth Funds Targets Selection: A Comparison with Pension Funds", Journal of International Financial Markets, Institutions and Money, 42, 60-76. https://doi.org/10.1016/j.intfin.2016.01.004
  13. Boubakri, N., J. C. Cosset and J. Grira (2017), "Sovereign Wealth Funds Investment Effects on Target Firms' Competitors", Emerging Markets Review, 30, 96-112. https://doi.org/10.1016/j.ememar.2016.09.003
  14. Boubakri, N., J. C. Cosset and N. Samir (2011), "Sovereign Wealth Fund Acquisitions: A Comparative Analysis with Mutual Funds", International Finance Review, 12(5), 355-389. https://doi.org/10.1108/S1569-3767(2011)0000012016
  15. Bradshaw, M. T., B. J. Bushee and G. S. Miller (2004), "Accounting Choice, Home Bias, and US Investment in Non-US Firms", Journal of Accounting Research, 42(5), 795-841. https://doi.org/10.1111/j.1475-679X.2004.00157.x
  16. Candelon, B., M. Kerkour and C. Lecourt (2011), Are Sovereign Wealth Funds' Investments Determined by Macroeconomic Factors? (University Maastricht Working Paper). Available from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.416.2383&rep=rep1&type=pdf
  17. Chhaochharia, V. and L. Laeven (2009), The Investment Allocation of Sovereign Wealth Funds (Working paper), University of Miami, Cornell University. Available from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1262383
  18. Chhaochharia, V. and L. Laeven (2010), Sovereign Wealth Fund: Their Investment Strategies and Performance (CEPR Working Paper). Available from https://www.researchgate.net/publication/24016515_Sovereign_Wealth_Funds_Their_Investment_Strategies_and_Performance
  19. China CSMAR Financial and Economic Databases. Available from http://www.gtadata.com/.
  20. Ciarlone, A. and V. Miceli (2016), "Escaping Financial Crises? Macro Evidence from Sovereign Wealth Funds' Investment Behavior", Emerging Markets Review, 27, 169-196. https://doi.org/10.1016/j.ememar.2016.05.004
  21. Covrig, V., S. T. Lau and L. Ng (2006), "Do Domestic and Foreign Fund Managers have Similar Preferences for Stock Characteristics? A Cross-Country Analysis", Journal of International Business Studies, 37(3), 407-429. https://doi.org/10.1057/palgrave.jibs.8400195
  22. Dahlquist, M. and G. Robertsson (2001), "Direct Foreign Ownership, Institutional Investors, and Firm Characteristics", Journal of Financial Economics, 59(3), 413-440. https://doi.org/10.1016/s0304-405x(00)00092-1
  23. Debarsy, N., J. Y. Gnabo and M. Kerkour (2017), "Sovereign Wealth Funds' Cross-Border Investments: Assessing the Role of Country-Level Drivers and Spatial Competition", Journal of International Money and Finance, 76, 68-87. https://doi.org/10.1016/j.jimonfin.2017.05.007
  24. Fernandes, N. (2011), Sovereign Wealth Fund: Investment Choices and Implications around the World (Working paper, IMD International). Available from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1341692
  25. Fernandes, N. (2014), "The Impact of Sovereign Wealth Funds on Corporate Value and Performance", Journal of Applied Corporate Finance, 26(1), 76-84. https://doi.org/10.1111/jacf.12083
  26. Ferreira, M. A. and P. Matos (2008), "The Colors of Investors' Money: The Role of Institutional Investors around the World", Journal of Financial Economics, 88(3), 499-533. https://doi.org/10.1016/j.jfineco.2007.07.003
  27. Gangi, F., A. Meles, M. Mustilli, D. Graziano and N. Varrone (2019), "Do Investment Determinants and Effects Vary across Sovereign Wealth Fund Categories? A Firm-Level Analysis", Emerging Markets Review, 38, 438-457. https://doi.org/10.1016/j.ememar.2018.12.004
  28. Gompers, P. and A. Metrick (2001), "Institutional Investors and Equity Prices", Quarterly Journal of Economics, 116(1), 229-259. https://doi.org/10.1162/003355301556392
  29. Griffith-Jones, S. and J. A. Ocampo (2008), "Sovereign Wealth Funds: A Developing Country Perspective", Available from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.529.2332&rep=rep1&type=pdf.
  30. Grira, J., C. Labidi and W. Rouatbi (2018), "Does Political Risk Matter for Sovereign Wealth Funds? International Evidence", International Review of Financial Analysis, Available online 3 August 2018.
  31. Johnson, S. (2007), The Rise of Sovereign Wealth Funds (US Finance and Development Report). Available from https://www.imf.org/external/pubs/ft/fandd/2007/09/pdf/straight.pdf
  32. Jory, S., M. Perry and T. Hemphill (2010), "The Role of Sovereign Wealth Funds in Global Financial Intermediation", Thunderbird International Business Review, 52(6), 589-604. https://doi.org/10.1002/tie.20381
  33. In, F., J. Park, P. Ji and B. Lee (2013), "Do Sovereign Wealth Funds Stabilize Stock Markets?", Available from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2276625
  34. Kern, S. (2007), Sovereign Wealth Funds: State Investment on the Rise (Deutsche Bank Research). Available from https://leblog-boursier.typepad.com/leblogboursier/files/fonds_dinvestissement_detat.pdf
  35. Keynes, J. M. (1936), The General Theory of Employment, Interest and Money. New York: Harcour Brace.
  36. Klein, A. and E. Zur (2009), "Entrepreneurial Shareholder Activism: Hedge Funds and Other Private Investors", Journal of Finance, 64, 187-229. https://doi.org/10.1111/j.1540-6261.2008.01432.x
  37. Knill, A., B. Lee and N. Mauck (2012), "Bilateral Political Relations and Sovereign Wealth Fund Investment", Journal of Corporate Finance, 18(1), 108-123. https://doi.org/10.1016/j.jcorpfin.2011.11.002
  38. Korea Company Information Database. Available from http://www.kocoinfo.com/.
  39. Kotter, J. and U. Lel (2008), "Friends or Foes? The Stock Price Impact of Sovereign Wealth Fund Investments and the Price of Keeping Secrets", International Finance Discussion Papers Number 940.
  40. Kotter, J. and U. Lel (2011), "Friends or Foes? Target Selection Decisions of Sovereign Wealth Funds and Their Consequences", Journal of Financial Economics, 101(2), 360-381. https://doi.org/10.1016/j.jfineco.2011.03.007
  41. Kunzel, P., L. Yinqiu, I. Petrova and J. Pihlman (2011), Investment Objectives of Sovereign Wealth Funds: A Shifting Paradigm (IMF Working Paper No. 11/19). Available from https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Investment-Objectives-of-Sovereign-WealthFunds-A-Shifting-Paradigm-24598
  42. Lane, P. and G. Milesi-Ferretti (2007), "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004", Journal of International Economics, 73, 223-250. https://doi.org/10.1016/j.jinteco.2007.02.003
  43. Lee, J., F. In, J. Khil, Y. Park and K. Wee (2018), "Determinants of Shareholder Activism of the National Pension Fund of Korea", Asia-Pacific Journal of Financial Studies, 47, 805-823.
  44. Megginson, W. L., A. Meles, G. Sampagnaro and V. Verdoliva (2016), "Financial Distress Risk in Initial Public Offerings: How Much Do Venture Capitalists Matter?", Journal of Corporate Finance, 59, 10-30. https://doi.org/10.1016/j.jcorpfin.2016.09.007
  45. Megginson, W., M. You and L. Han (2013), "Determinants of Sovereign Wealth Fund CrossBorder Investments", The Financial Review, 48(4), 539-572. https://doi.org/10.1111/fire.12015
  46. Mills, K., S. Morling and W. Tease (1994), The Influence of Financial Factors on Corporate Investment (Research Discussion Paper 9402), Reserve Bank of Australia. Available from https://www.rba.gov.au/publications/rdp/1994/pdf/rdp9402.pdf
  47. Schonberg, S. (2008), "Sovereign Wealth Alarm", The International Economy, 22(1), 56-81.
  48. Smith, M. (1996), "Shareholder Activism by Institutional Investors: Evidence from CalPERS", Journal of Finance, 51, 227-252. https://doi.org/10.1111/j.1540-6261.1996.tb05208.x
  49. Sovereign Wealth Fund Institute. Available at: http://www.swfinstitute.org/.
  50. Sovereign Wealth Fund Transaction Database. Available from http://www.swftransaction.com/.
  51. Sun, T. and H. Hesse (2011), "What do Sovereign Wealth Funds Imply for Financial Stability?", International Finance Review, 12(5), 245-262. https://doi.org/10.1108/S1569-3767(2011)0000012012
  52. TheCity UK. Available from http://www.thecityuk.com/.
  53. The People's Bank of China. Available from http://www.pbc.gov.cn/.
  54. Tobin, J. (1969), "Ageneral Equilibrium Approach to Monetary Theory", Journal of Money, Credit and Banking, 1(1), 15-29. https://doi.org/10.2307/1991374
  55. Zhang, Hong-Xia and Heeho Kim (2019), "Foreign Bias of Sovereign Wealth Fund and Spatial Spillover Effects", Singapore Economic Review, 64(2), 377-397. https://doi.org/10.1142/s021759081747004x