Study Finds Canada the Innocent Bystander Amid Turbulent Markets

(July 8, 2010) — While sovereign wealth fund investments in US financial institutions during the economic crisis may have helped settle American markets, they hurt Canada’s, a new study shows.

“Canada was a good case study because it emerged from the financial crisis relatively unscathed,” Michael S. Pagano, a Villanova Business School professor and co-author of the study, told ai5000. “We found it was beneficial to the US to have money flow into the country, but there was an extraction of capital from other countries.”

According to an academic study co-authored by Pagano and Vincent Gasparro, a Toronto private equity executive who is also one of Pagano’s former students, news of a SWF capital investment resulted in US short-term interest rates dropping up to 61 basis points while corporate rates in Canada jumped between 15 and 29 basis points.

The authors found that news related to the financial crisis and SWF investments in US and European firms not only affected returns on US money market instruments and firms’ common stock but also created negative “spillover” effects on Canadian money markets and Canadian firms’ equity returns, the report stated.

Pagano told ai5000 that there are a handful of lessons to learn from this study. First, investors need to think about where SWFs are putting their money, because it could signal to the outside world where global capital is being reallocated. Gasparro told the Globe and Mail that Canada needs to do more to lure investment. “Is Canada waving its flag enough to get the attention of people? Because there’s a finite amount of capital, it’s going to go to not only where the best investment is, but also where the best-known investment is,” he said. “We need to make ourselves more visible.”

Pagano and Gasparro are considering a follow-up study to measure the long-term effects of SWF injections.

The study, titled “Sovereign Wealth Funds: An Early Look at their Impact on Debt and Equity Markets during the 2007-2009 Financial Crisis,” used data from 2006 and 2009 in its analysis and was published in the May/June issue of the Financial Analysts Journal.