SWF Investments Not Boosting Target Company Stock Prices

Includes: C, MER, MS, UBS
by: Research Recap

Investments by Sovereign Wealth Funds often give the target company’s stock price a small boost, but the effect is short-lived, new research suggests.

A study* by scholars at the University of Oklahoma’s Price College of Business examines the impact of SWF investments on publicly listed companies.

The study’s authors emphasize in strong terms that their findings are very preliminary. Nor is there much research on SWFs to build upon. Indeed, the authors go so far as to state, “We consider the present a starting point in formal analysis of the SWF phenomenon.”

The authors “find evidence supporting the hypothesis that SWFs are acting in a manner that is consistent with profit maximization. While we are unable to rule out other potential goals, we believe our results should act as a reassurance to both regulators and market participants.”

They “hypothesize that markets would react negatively to equity investments by SWFs; yet, in a limited sample, we find stocks of targeted corporations exhibiting positive abnormal returns.”

We offer empirical evidence of the fact that, despite the negative tones in the press, investors welcome SWFs and that markets react positively to equity acquisitions by these funds, with an average announcement period abnormal return of 1.1%.

The authors theorize that SWFs’ tendency to hold stocks for the long term would remove some pressure on management to perform strongly. Their preliminary research seems to confirm this:

…despite the positive market reaction, we hypothesize that investments by SWFs have a negative impact on management incentives and lead to deteriorating firm performance. In support, we document abnormal returns equal to negative 6.63% for firms whose shares have been acquired by SWFs in the 120 days following the acquisition.

From their preliminary analysis, the authors found little evidence for the hypothesis that SWFs aim at technology or know-how acquisition. “Industry and sector allocations appear to vary greatly across funds, but we did not find evidence of any funds being heavily invested into hi-tech sectors. But we should cite Singapore’s two SWFs, Temasek Holdings and GIS, both of which have invested heavily into the financial sector with the stated goal of building networks that would encourage the development of local capital markets.”

*The Financial Impact of Sovereign Wealth Fund Investments in Listed Companies;(Veljko Fotak and William Megginson, Michael F. Price College of Business, University of Oklahoma.)