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Bilateral political relations and sovereign wealth fund investment

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  • Knill, April
  • Lee, Bong-Soo
  • Mauck, Nathan

Abstract

We examine the role of bilateral political relations in sovereign wealth fund (SWF) investment decisions. Our empirical results suggest that political relations play a role in SWF decision making. Contrary to predictions based on the FDI and political relations literature, we find that relative to nations in which they do not invest, SWFs prefer to invest in nations with which they have weaker political relations. Using a two-stage Cragg model, we find that political relations are an important factor in where SWFs invest but matter less in determining how much to invest. Inconsistent with the FDI and political relations literature, these results suggest that SWFs behave differently than rational investors who maximize return while minimizing risk. Consistent with the trade and political relations literature, we find that SWF investment has a positive (negative) impact for relatively closed (open) countries. Our results suggest that SWFs use—at least partially—non-financial motives in investment decisions.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 18 (2012)
Issue (Month): 1 ()
Pages: 108-123

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Handle: RePEc:eee:corfin:v:18:y:2012:i:1:p:108-123

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Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: Sovereign wealth fund; Investment determinants; Political relations; Foreign investment;

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References

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Citations

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Cited by:
  1. Ang, James & Knill, April & Mauck, Nathan, 2014. "Investment Opportunity Sets of Real Assets: An International Empirical Study Based on Ownership Types," MPRA Paper 53359, University Library of Munich, Germany.
  2. Knill, April M. & Lee, Bong Soo & Mauck, Nathan, 2012. "Sovereign wealth fund investment and the return-to-risk performance of target firms," Journal of Financial Intermediation, Elsevier, vol. 21(2), pages 315-340.
  3. Sun, Xiaolei & Li, Jianping & Wang, Yongfeng & Clark, Woodrow W., 2014. "China's Sovereign Wealth Fund Investments in overseas energy: The energy security perspective," Energy Policy, Elsevier, vol. 65(C), pages 654-661.

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