In this Article, we attempt to test for the existence of SWFs’ political value from a different perspective: if governments exploit SWFs as investment vehicles aimed at pursuing political goals, then international relations will have a strong impact on both (1) SWFs’ investment behavior and (2) the level of regulatory scrutiny received from foreign regulators. The latter might directly affect firms’ strategies and investment policies, imposing deviations from a firm’s value-maximizing equilibrium and therefore resulting in a lower market valuation. Thus, if we can identify an exogenous shock to international political relations, it would be possible to employ an event study methodology to identify the economic consequences of SWFs’ political value. We argue that the recent election of Donald J. Trump as President of the United States represents the ideal setting in which to identify whether foreign SWFs’ American-based targets are characterized by a higher sensitivity to international political relations, ceteris paribus. In particular, our identification strategy is based on the hypothesis that if SWFs are political vehicles used by foreign governments to affect the U.S. political system, then we should observe a strong heterogeneity in firms’ reactions to this unexpected electoral outcome, conditional on which SWF owns them. That is, firms owned by SWFs from countries that were heavily attacked by then-candidate Trump during his presidential campaign (directly or indirectly) should react more negatively than those owned by “non-attacked” SWFs (countries).
We test this hypothesis by studying fifty-two public, U.S.-based firms partially owned by SWFs, and we identify weak support for international political relations being priced in the market. While concerns related to endogeneity in SWFs’ investments are attenuated by the use of a quasi-natural experiment, the small sample size and self-selection in information disclosure should be carefully taken into account when interpreting these results. Nonetheless, visual inspection of the differential in the cumulative abnormal returns experienced by firms partially owned by Middle Eastern SWFs versus other firms in our sample provides additional evidence (or at least a new anecdote) calling for further research aimed at identifying, within a causal framework, whether or not SWFs are political entities.
