Monday, February 25, 2013 01:35:18 PM
Michael Koerner '49 Professor of Entrepreneurial Finance, MIT Sloan School of Management
Sovereign funds beware: Schoar and her collaborators (including other listee Josh Lerner) will call you out for shortsightedness. "We've written a paper, and updated it (in 2011, titled 'The Investment Strategies of Sovereign Wealth Funds'), and have basically found that governance issues and home-country biases persist in the sovereign space," she says. "Even taking into consideration the different goals of certain funds—some are meant to be long-term savings, others cyclical stability funds—we still found that sovereigns are more likely to invest at home when prices are high and when politicians are involved." The solution? "A combination of governance along with a political discourse with the population. If you look at Chile, for example, it is amazingly positive. They have been able to put aside a lot of resource profits in good times to then invest when the country needs the money. For example: after the earthquake in Chile three years ago, the rebuilding was paid for using the sovereign funds." However, Schoar acknowledges that this is all predicated on public trust. "You need to educate the public about what the money will be used for, and you have to make sure they believe that the money is being invested well. If people believe it's being saved and well-invested, then it works."