Q&A with Vidhi Chhaochharia, Professor of Finance at the University of Miami

By Ashby Monk

This blog is a source of open discussion and engagement on the topic of SWFs. As such, we welcome and indeed seek out all views and opinions on the subject. Today, we offer the eighth instalment of our segment: “Q&A with a SWF expert, stakeholder or policymaker”. An archive of past Q&A’s is also available. We are pleased to welcome Vidhi Chhaochharia of the University of Miami School of Business. While Prof. Chhaochharia’s views are her own, her perspective helps to further debate and facilitate understanding.

Ashby Monk: Thanks for joining us today, Vidhi. Can you briefly explain how you came to be interested in SWFs, and where they fit into your research agenda?

Vidhi Chhaochharia: My research interests have generally focused on the impact of corporate governance regulations on valuation and managerial compensation. I have also done some research on extending these ideas to an international setting. Some of my research has focused on corporate governance norms and practices around the world and its impact on firms decisions. My interests in corporate governance and international finance together drew me towards SWFs which have gained prominence in the recent years. These funds have huge asset bases and are investing in companies around the world. At the same time, for many of them transparency is weak, and we don’t know much about their governance structure. Many articles in the popular press have expressed scepticism of these SWFs’ investing motives as well as claims on whether they have strategic investments; especially in light of the present crises. These facts together drew us towards studying these funds and how they behave and whether they are different from other mutual funds etc. Their lack of transparency also intrigued us and we wanted to investigate how these investments are perceived based on transparency of these funds.

It is not clear what the effect is of SWF investments on firm value. In fact, empirical evidence to date is ambiguous about the impact of institutional ownership on firm value. Given their size and growing importance as global equity investors, SWFs could play an important role as large shareholders in monitoring firms.

Ashby Monk: Given that you recently wrote a paper on SWFs’ investment strategy and performance, I’m curious as to how you see these variables changing as a result of the recent financial crisis. Are SWF investment strategies evolving?

Vidhi Chhaochharia: SWFs are not required to reveal information regarding their investments etc. Except for a few funds like the Government Pension Fund of Norway, most do not reveal such information. We collect information based on news articles, SEC filings etc to create a dataset on potential investments that are made by these SWFs. For some of the funds we are unable to collect too many investments. The paper is based on all investments as of March of 2008. Many of the funds at that time were making big capital injections into the banks in light of the recent financial crisis. Since then many of these funds have been unwilling to invest more in the big banks especially in the US.

I am sure that the SWF investment strategies are evolving, and we have a sense of that from many of the articles we read in the New York Times and Wall Street Journal. In the current version of the paper we are unable to track changing strategies but we are currently in the process of updating our dataset and will then have more of an opportunity to do so.

Ashby Monk: In you paper, you uncover some pretty interesting SWF investment biases. Can you briefly explain what these are and where they come from?

Vidhi Chhaochharia: Several insights emerge from our analysis. Firstly, SWFs generally invest to diversify away from industries at home but they are biased towards countries with similar cultural origins (such as religious affinity). This suggests that their investment rules are not entirely driven by profit maximizing objectives. Cultural biases have been found to influence global capital flows and global asset allocation. For example, Guiso, Sapienza, and Zingales (2007) show that cultural variables affect portfolio and foreign direct investments. Secondly, geographic diversification is limited, with most funds exhibiting substantial home bias. Despite exhibiting cultural biases, SWFs often invest in companies that are financially constrained, thus enhancing the value of such firms. Currently we need to continue these biases more carefully since we do not have the complete equity investment coverage for each of the funds. We are working on updating our database to understand these biases better.

Ashby Monk: What are the implications of the above? You seem to be suggesting that these findings are illustrative of non-commercial objectives?

Vidhi Chhaochharia: Some of our results can be interpreted in terms of inherent cultural biases that do affect portfolio decisions. While politicians and economists have expressed concerns that SWFs invest in strategic industries, our results offer a somewhat more benign view of SWFs. We really do not have much evidence in that direction.

Given the importance of SWFS as big players in the global equity they could potentially play an important role as large shareholders in monitoring firms, but given their lack of transparency and potentially conflicting objectives they are unlikely to achieve such a role at this stage. Therefore, we agree with the view expressed by many academics and policy makers that SWFs should become more transparent about their investment holdings and strategies.

Ashby Monk: Your specialty is corporate governance. I found your 2007 Journal of Finance paper on the relationship between governance and firm performance to be particularly interesting. Have you given any thought as to how governance impacts performance within a financial institution? 

Vidhi Chhaochharia: Much of the research in corporate governance has focused at looking at different monitoring mechanisms and their impact on firm performance as well as other corporate decisions. Research on financial institutions like banks or other institutions show similar relations. A recent paper by Laeven and Levine (2008) show that a combination of external regulations as well as the internal governance play an important role in the risk taking behaviour of the banks. Such relations can be easily extended to other financial institutions.

Ashby Monk: Thanks, Vidhi, for taking time out of your busy schedule to chat with us today. We really appreciate it.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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