Veljko Fotak

Government Ownership and the Cost of Debt: Evidence from Government Investments in Publicly Traded Firms

We investigate the effect of government share ownership on the cost of corporate debt. Government ownership could carry an implicit debt guarantee reducing the chance of default and leading to a lower cost of debt. On the other hand, government ownership could lead to a higher cost of debt if this guarantee increases moral hazard for managers and if state owners impose social and political goals that reduce corporate profitability. Using a sample of 5,048 bond credit spreads from 43 countries over 1991-2010, we find that government ownership is associated with a higher cost of debt in non-crisis years (61 basis points (bp)) but with a lower cost of debt during the recent financial crisis (18 bp) and other banking crises (9 bp). We further show that the cost of debt associated with government ownership generally decreases as the size of the government stake increases. The impact of government ownership is stronger for non-investment-grade bonds and for bonds associated with highly-levered firms. Additionally, we document that the effect of government ownership differs by type of government entity; for instance, lower spreads are more often associated with central governments, and higher spreads with sovereign wealth funds. Finally, domestic government ownership is linked to a decrease in debt pricing, while foreign government ownership is tied to an increase. Our results indicate that government ownership generally leads to a higher cost of debt, consistent with investment distortion fostered by state influence, but in times of economic recession or firm distress, the dominant effect is a reduction in perceived default risk due to implicit government guarantees.

Rise of the Fiduciary State: A Survey of Sovereign Wealth Fund Research

We survey the literature documenting the rise of sovereign wealth funds (SWFs), which, with assets under management of over

RISE OF THE FIDUCIARY STATE: A SURVEY OF SOVEREIGN WEALTH FUND RESEARCH: RISE OF THE FIDUCIARY STATE

5.4 trillion at year-end 2014, are a major force in global finance. Research papers have analyzed the evolution of SWFs from stabilization funds to stand-alone wealth management funds; we both survey this research and show that more than 25 countries have launched or proposed new SWFs since January 2008. The most salient and controversial feature of SWFs is that they are state-owned; we survey the existing literature on state ownership and discuss what this predicts about the efficiency and beneficence of government control of SWF assets. We discuss the documented importance of SWF funding sources (oil sales revenues versus excess reserves from export earnings) and survey the normative literature describing how SWFs should allocate funds. We then summarize the empirical literature studying how SWFs actually do allocate funds—across asset classes, geographically, and across industries. We document that most SWF equity investments in publicly traded firms involve cross-border purchases of sizeable minority stakes (median around 20%) in target firms, with a strong preference for investments in the financial sector. Next, we assess empirical studies examining the impact of SWF stock investments on target firm financial and operating performance, and find universal support for a positive announcement period stock price increase of 1–3%. This, however, is significantly lower than the 5% abnormal return documented for stock purchases by comparable privately owned financial investors in recent studies, indicating a “sovereign wealth fund discount.” We conclude by summarizing the lessons of SWF research and pointing out unresolved issues.

The Rise of Sovereign Wealth Funds: Definition, Organization, and Governance

We survey the literature documenting the rise of sovereign wealth funds (SWFs), which, with assets under management of over

A Financial Force to Be Reckoned with? An Overview of Sovereign Wealth Funds

5.4 trillion at year�?end 2014, are a major force in global finance. Research papers have analyzed the evolution of SWFs from stabilization funds to stand�?alone wealth management funds; we both survey this research and show that more than 25 countries have launched or proposed new SWFs since January 2008. The most salient and controversial feature of SWFs is that they are state�?owned; we survey the existing literature on state ownership and discuss what this predicts about the efficiency and beneficence of government control of SWF assets. We discuss the documented importance of SWF funding sources (oil sales revenues versus excess reserves from export earnings) and survey the normative literature describing how SWFs should allocate funds. We then summarize the empirical literature studying how SWFs actually do allocate funds — across asset classes, geographically, and across industries. We document that most SWF equity investments in publicly traded firms involve cross�?border purchases of sizeable minority stakes (median around 20%) in target firms, with a strong preference for investments in the financial sector. Next, we assess empirical studies examining the impact of SWF stock investments on target firm financial and operating performance, and find universal support for a positive announcement period stock price increase of 1-3%. This, however, is significantly lower than the 5% abnormal return documented for stock purchases by comparable privately owned financial investors in recent studies, indicating a “sovereign wealth fund discount.�? We conclude by summarizing the lessons of SWF research and pointing out unresolved issues.

Trust and Debt Contracting: Evidence from the Backdating Scandal

The economic role of governments has, of course, been evolving rapidly over the past several decades. States have always and everywhere regulated private businesses to a greater or lesser degree, but many also chose to enter business as owners. Mostly from the Great Depression onwards, governments around the world launched (or nationalized) companies that produced goods and services sold to the nation’s populaces, often under monopolistic regimes (Shleifer 1998; Megginson 2005). As these state-owned enterprises (SOEs) spread and citizens experienced the often poor quality of their output, disillusion with SOEs prompted governments to adopt a new policy of privatization. Since its introduction by Britain’s Thatcher government in the early 1980s to a then-skeptical public, privatization now appears to be accepted as a legitimate—often a core—tool of statecraft by many of the world’s over 190 national governments. Since 1977, governments around the world have raised over US

A BIT of Investor Protection: How Bilateral Investment Treaties Impact the Terms of Syndicated Loans

2.5 trillion by selling state-owned enterprises to private investors and corporations (Megginson 2013).

Crash Risk and Seasoned Equity Offerings

Sovereign Wealth Funds (SWFs) represent a new form of investment organizational structure and have grown to over

Unethical Behavior and Debt Contracting: Evidence from Backdated Option Grants

5.7 trillion assets under management by February 2016, making them a financial force potentially worth reckoning with in international financial markets. This article starts with a brief introduction of the 35 funds that meet our definition of SWFs, then discusses their evolution from stabilization funds to SWFs and illustrates the differences and similarities between the various types of funds. The most salient and controversial feature of SWFs is that they are state-owned; we survey the existing literature on state ownership and discuss what this predicts about the efficiency and beneficence of government control of SWF assets. We discuss the documented importance of SWF funding sources (oil sales revenues versus excess reserves from export earnings) and survey the normative literature describing how SWFs should allocate funds. We then summarize the empirical literature studying how SWFs actually do allocate funds across asset classes, geographically, and across industries. We document that most SWF equity investments in publicly traded firms involve cross-border purchases of sizeable minority stakes (median around 20%) in target firms. However, the most recent data shows a “shift to domestic investment” pattern and also an industry preference change from the financial to the real estate sector. Next, we assess empirical studies examining the impact of SWF stock investments on target firm financial and operating performance, and find universal support for a positive announcement period stock price increase of 1-3%. This, however, is significantly lower than the 5% abnormal return documented for stock purchases by comparable privately owned financial investors in recent studies, indicating a “sovereign wealth fund discount.” Finally, we point out the unresolved issues and possible extensions in SWF research, and assess how the massive decline in oil export revenues by major SWF sponsor nations such as Abu Dhabi, Russia, Kuwait, and Norway is likely to impact SWF investment levels in coming years.

Unethical Behavior, Dis(trust), and Debt Contracting: Evidence from Backdated Option Grants

We study the impact of unethical behavior on debt contracting. We find that, after the revelation of option backdating, borrowers pay higher interest rates on loans, by about 19 basis points. This increase in the cost of debt is greater for loans originating from lenders with no prior relationship with the borrower, for geographically distant lenders, and for opaque borrowers. Our results suggest that the revelation of unethical behavior leads to an increase in perceived information risk. On the other side, we do not find any impact on the cost of public debt and find that, after the revelation, backdating borrowers increase their reliance on public, rather than private, debt.