Sovereign Wealth Funds: The Investment Effects of Organizational Purpose and Political Regime

State-owned organizations, such as sovereign wealth funds (SWFs), are increasingly important global investors. Despite widespread acknowledgement that SWFs are heterogeneous in their investment profiles and strategies, existing research has treated them as a homogeneous investor class. This study seeks to advance the understanding of SWFs by distinguishing among them based on their organizational purpose and the moderating effect of the home country political regime. For example, the organizational purpose of savings SWFs is to share the wealth of a country across generations whereas the organizational purpose of foreign exchange reserve funds is to invest surplus reserves overseas to reduce the negative carry costs of holding reserves. Consequently, savings funds can make larger, longer-term investments than foreign exchange reserve funds, which in turn enables savings funds to have larger valuation effects on target firms. Autocracies are posited to amplify SWF valuation effects in relation to democracies due to weak or absent constraints on the government intervening in an SWF's investment strategy, thereby magnifying the potential for SWFs to pursue political objectives at the expense of financial performance. Findings based on a sample of 10,488 SWF investments support these expectations.