How Would Investing in Equities Have Affected the Social Security Investment Fund in an Emerging Market? Can Governance Help?

Abstract

: Purpose: This paper explores the impact of the Social Security Investment Fund's (SSIF) portfolio diversification into private securities in Jordan. However, the policy shift exposes the program to higher financial risk. Design/methodology/approach: It extends to examine whether corporate governance can be related to better performance and can be used as an additional selection criterion for sound investment decisions. SSIF is the largest fund in Jordan, with a market value of 14.5 billion dollars as of 2019. SSIF believes that investing a portion of its assets in equities would likely reduce the need for higher payroll taxes and strengthen the program's long-term financial outlook. Findings: Investment and long-term asset values can move in opposite directions. Constructing the first Corporate Governance Index (CGI) for Jordan's firms, we document a negative relationship between CGI and portfolio performance. Asset selection increases portfolio return while at the same time, lower the governance level of the selected stock portfolio. This result is in line with prior empirical research, which also demonstrated that the lower the governance standards, the stronger the correlation between governance and firm value and performance. Practical inplementation: Investing a portion of trust fund assets in equities would likely reduce the need for higher payroll taxes and strengthen the program's long-term financial outlook. Originality value: Social security trust fund's policy shift towards more equity investment reduces the aggregate capital stock and exposes future generations to more uncertainty.