This content is from: Opinion

New Research: Reconciling Transparency and Long-Term Investing

Because of their lack of liabilities, the community of sovereign funds could offer an antidote to the pervasive short-termism in financial markets today. So what's preventing that from happening? We examine the role of transparency in driving short termism...

I’ve just finished another working paper with my co-author Dr. Adam Dixon entitled “Reconciling Transparency and Long-Term Investing within Sovereign Funds”. In this paper, we evaluate the tension that exists between transparency and long-term investing, in particular as it relates to sovereign funds.

Why?

Because the almost exponential growth of sovereign funds these past few years could offer an antidote to the pervasive short-termism in financial markets today. The 60 or so SWFs in the world are qualitatively different from other institutional investors in that they have a single owner – the government sponsor – that (in theory) has a perpetual time horizon. 

And yet, these theoretically long-term investors are being pressured into behaving like the many short-term investors in the marketplace today, pushed by structural conditions that demand short-term performance in order to secure domestic and international legitimacy (e.g., the Santiago Principles).

So what’s our paper about?

Well, we make the argument that transparency and long-term investing are both positive for society. However, some forms of transparency may be counterproductive to long-term investing. And yet, rationing transparency can be dangerous, as it means the fund may be operating without society’s acquiescence, a fundamental concern in democratic states and a norm of contemporary financial markets.

In evaluating this tension, we offer a conceptual framework for thinking through different types of transparency pertaining to the investment process as a means of discussing and communicating acceptable and non-acceptable asymmetric information in relation to financial performance.

We hope you find it useful. Comments and critiques, as always, are welcome and indeed appreciated.

Download it here.

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