Karin Knorr Cetina and Alex Preda
Section I. Inside Financial Markets
1. The Embeddedness of Electronic Markets: The Case of Global Capital Markets
Saskia Sassen 17
2. How are Global Markets Global? The Architecture of a Flow World
Karin Knorr Cetina 38
3. How a Superportfolio Emerges: Long-Term Capital Management and the Sociology of Arbitrage
Donald MacKenzie 62
4. How to Recognize Opportunities: Heterarchical Search in a Trading Room
Daniel Beunza and David Stark 84
5. Emotions on the Trading Floor: Social and Symbolic Expressions
Jean-Pierre Hassoun 102
6. Women in Financial Services: Fiction and More Fiction
Barbara Czarniawska 121
Section II. The Age of the Investor
7. The Investor as a Cultural Figure of Global Capitalism
Alex Preda 141
8. The Values and Beliefs of European Investors
Werner De Bondt 163
9. Conflicts of Interests in the US Brokerage Industry
Richard Swedberg 187
Section III. Finance and Governance
10. Interpretive Politics at the Federal Reserve
Mitchel Y. Abolafia 207
11. The Return of Bureaucracy: Managing Dispersed Knowledge in Global Finance
Gordon L. Clark and Nigel Thrift 229
12. Enterprise Risk Management and the Organization of Uncertainty in Financial Institutions
Michael Power 250
13. Managing Investors: How Financial Markets Reshaped the American Firm
Dirk Zorn, Frank Dobbin, Julian Dierkes, and Man-shan Kwok 269
14. Nothing but Net? Networks and Status in Corporate Governance
Gerald Davis and Gregory Robbins 290
Index 313
This
book is about the social and cultural study of finance, of the markets and
institutions used for financial transactions, and the trading of assets and
risks. The financial system controls and manages credit; in contemporary
societies, the ultimate users of real capital rely heavily on others
(investors) to provide the funds with which to acquire the resources they need.
Investors make the transfers of money to those seeking credit in the hope of
reaping profits at later points in time; the debts the receivers of the funds
incur are claims investors can make on future income and on economic output and
development. Characteristically, these claims (which take the form of company
shares, governments bonds, etc.) and their derivatives are marketed and traded
on financial markets—with
the help of financial intermediaries (e.g. banks, brokerage houses, insurance
companies) who package the deals, assume some of the risks, and facilitate the
trading of claims and risks among market participants. The existence of such
markets allows participants to sell claims and risks they no longer want, and
to pursue additional profits through clever trading. Financial markets, then,
are a major, if not the most important component of the credit mechanism in
risk-based economies. Economists regard them as constituting an efficient
mechanism that fulfills vital functions of, and for, the financial system: for
instance, they pool and transfer wealth for capital use, decrease the costs of
finance (through the elimination of banks as direct lenders), and spread and
control risks—risk being more widely distributed when credit is obtained in
financial markets through the splitting of shares and through derivative
products that can be used for hedging risky investments (e.g. Merton and Bodie
1995: 4f., 13-15).
In
contemporary Western societies, financial activities are a defining characteristic
not only of the corporate economy, but also of politics, the welfare and social
security system, and general culture. For example, the corporate economy has
long depended on credit to finance production and investments. A Robinson
Crusoe with nothing to invest could not hope to produce much. He would first
have to invest his own time and labor in order to build the rudiments of a
productive capital structure (Shapiro 1985: 77). As Susan Strange argues (1994:
30), if we had had to wait for profits to be accumulated there would have been
none of the economic growth of the past decades in industry and agriculture.
The state has long needed credit and borrowed vast amounts of money. From the
seventeenth century onward, states systematically financed costly military
interventions by issuing debt (government bonds) and borrowing money from banks
and financial intermediaries, habits in which the financial sector might well
have its earliest roots (Neal 1990). State borrowing continues to be strong
today, though now it is more oriented toward deficit management and investment
spending. In general terms, Western governments operate in interaction with the
developments on financial markets. State officials and central bankers observe
the price movements of currencies and financial indicators whose value may
have an impact in a given geographic area, and they respond to them by talk and
policy changes in an attempt to manage market participants’ expectations and
behavior (see Abolafia, Chapter 10, this volume). The state is interlinked with
the financial system through government fiscal and regulatory policies which
impact on the financial markets (e.g. Fligstein 2001: 201-2), and through the
incentives states provide to attract financial investments and systems. A
central component of modern welfare societies, pension systems, also depend on
and interact with financial markets. Reserves that pay benefits to retirees are
assets managed through investment vehicles. Finance is, moreover, now an ever
more present part of the larger culture, as exemplified by the expansion of
media attention given to finance. The first all-news financial television
network appeared in the United States in 1983. It was soon followed by and
absorbed into other networks (e.g. CNBC, CNNfn, Bloomberg Television and
Radio). Newspapers also expanded their business section into enhanced ‘Money’
sections; together, these media provide an uninterrupted stream of financial
and business news consulted by both a lay and a professional audience (Shiller
2000: 28-9). Barbara Czarniawska (Chapter 6, this volume) shows that the world
of finance is present in popular culture—in consultancy books that dispense
useful tips about personal investing mingled at times with autobiographical
accounts (e.g. Schwager 1989, 1992), and in films and novels (e.g. Lewis 1989;
Ridpath 1996; Partnoy 1997) that capture the dominant view of finance in our
times.
Ours
is not, of course, the first period in history to demonstrate a heightened
curiosity in investment and some breathtaking movements of financial markets
(see below and Preda, Chapter 7, this volume). But finance has perhaps risen in
importance in the last quarter century more rapidly than any other sector of
the economy. Since it bottomed out in 1982, the US stock market has experienced
the most dramatic price increases in its history, if long-term data (1871-2000)
are considered, and large stock price increases also occurred in Europe, Asia,
and Australia (Shiller 2000: 5 ff.). In the period between 1981 and 1986 alone
the volume of US public bond issues rose at an annual rate of 37%, equity
issues almost tripled, the dollar volume of mergers and acquisitions activity
tripled, and the volume of international bonds multiplied fivefold (Eccles and
Crane 1988: 1). Since then there have been various dramatic falls in prices
(examples are the ‘Black Monday’ of October 19, 1987 when the Dow Jones
Industrial Average dropped 508 points, and the market declines of 2001 and
2002). Nonetheless, the level and diversity of financial activities appears to
have increased significantly since the 1980s. More importantly, perhaps,
awareness of the financial system and of the risks and benefits it offers to
individuals and organizations has also risen. As Sassen points out (Chapter 1,
this volume), since 1980 the stock of financial assets has increased three
times faster than the aggregate gross domestic product (GDP) of the
twenty-three highly developed Organization for Economic Cooperation and
Development (OECD) countries, and the volume of trading in currencies, stocks,
and bonds has increased five times faster. Most of this activity is financial
market activity. For example, the global foreign direct investment stock was
US$6 trillion in 2000, while the worldwide value of internationally traded
derivatives was over US$80 trillion, and rose to US$192 trillion in 2002. In
1983, on the largest financial market in terms of volume of transactions, the
foreign exchange market, transactions were ten times as large as world trade
(the economic exchange of goods and services), but in 1999 they were seventy
times larger, even though world trade also grew significantly during this period
(Sassen, Chapter 1, this volume).
Financial
markets in particular, then, have risen in importance since the early 1980s,
and their power to determine outcomes in production, consumption, and social
welfare is enormous. Yet to date they have not been paid much attention by
sociologists. This is somewhat surprising in the light of the sharp upturn
economic sociology has taken in the last twenty years, and the pioneering work
that has been done in this field (e.g. White 1981; Granovetter 1985; Burt 1992;
Fligstein 2001; Podolny 2001). Why the relative lack of interest in financial
markets then? One answer surely is that the new economic sociology has focused
on aspects of the economy,
an area which has to be distinguished from that of finance. Economists have
defined economic activities as that set of pursuits which involves the use of
scarce resources to satisfy various human needs or wants—and they have broadly
classified these activities into the categories of production, consumption, and
exchange (Dholakia and Oza 1996: 7). Economic sociology also defines economic
behavior in these terms—in terms of the institutions and relations of
production, consumption, and social distribution (e.g. DiMaggio 1994: 28;
Smelser and Swedberg 1994: 3; Portes 1995: 3). In their research, economic
sociologists have focused on the production side of the economy, taking the
firm as their point of departure—in line with the distinctive role production
has played in the discipline’s understanding of capitalism and with the focus
early economic sociologists placed on the internal working of organizations
(Swedberg 1991; Baron and Hannan 1994; Carruthers and Uzzi 2000: 486). Though a
number of early studies were concerned with financial markets (Smith 1981;
Adler and Adler 1984; Baker 1984), most recent research has not been in this
area but has involved a shift from what goes on within firms to what goes on
between them. The dominant line of research specializes in the analysis of
interorganizational ties, in effect joining organizational analysis and market
analysis through the use of network approaches that analyze the nature of the
relationships and networks and how these affect labor, product, and
credit-seeking (e.g. White 1981; Burt 1983; Baker 1990; Baker, Faulkner, and Fisher
1998; DiMaggio and Louch 1998; Uzzi 1999). When markets are analyzed they tend
to be producer markets, for example, markets for industrial products and
nonfinancial services. Characteristically, the research glosses over
distinctions between producer markets and financial markets in an effort to
address the question of how economic activities are embedded in social
structure (Granovetter 1985). While this research does not reject differences
between markets, it is also not designed to capture the types and patterns of
social structural and cultural variation that a ‘multiple market’ model
(Zelizer 1988) suggests. Yet differences between producer markets and
financial markets are consequential for almost every level of analysis of
markets.
Financial
markets are not primarily concerned with the production of goods or with their
distribution to clients but with the trading of financial instruments not
designed for consumption. No ‘production’ effort on the trader’s part is
involved in ‘spot’ transactions, the direct sale or buying of a financial
instrument. When more complex instruments are traded (options, futures, etc.),
their value tends to be calculated on the spot by traders themselves without
recourse to production facilities. Financial markets belong to a second-order
economy where the ‘goods’ are contracts (equities, bonds, currencies,
derivatives) that circulate
rather than being channeled to end consumers. There are two aspects to the
sense in which these markets are steps removed from the ordinary economy of
production and consumption. The first pertains to the instruments traded, which
are not the funds investors provide but the shares and obligations they obtain
in return for their investment and the contracts they enter into so as to
protect these investments. Thus financial market participants do not withdraw
credit directly from a company when they sell company shares; what may happen
is that the sale influences the value of these shares. The shares and other
instruments are abstract entities which may not even be pieces of paper but
merely an entry in the books of the respective parties; the value of these
entities is determined by financial market activities and is only tenuously
related to the underlying referent (e.g. a company). The shift from concrete
funds to abstract entities epitomizes the decoupling of financial markets from
the ordinary economy of production, consumption, and exchange. The second
aspect of this decoupling has to do with the form of action prevalent in
financial markets, which is ‘speculation.’ Consider the example of the foreign
exchange market, where ‘actuals’ (currencies) rather than contracts are traded
in spot transactions (though these currencies nonetheless take the form of
abstract entities). Historically, currency (foreign exchange) dealers provided
services for importers, exporters, and others who needed foreign exchange to
pay bills and pay for goods. They were intermediaries in conventional trading
oriented to the transfer of goods from producers to consumers. But only a tiny
percentage of the current daily trading volume in foreign exchange (about
US$1.2 trillion in 2001; Bank for International Settlements 2002) reflects any
‘real’ requirements of companies; the daily volume of dollar transactions in this
market is approximately 200 times larger than the added volume of US
merchandise imports and exports, plus other sales that require foreign exchange
(e.g. Caves, Frankel, and Jones 1999: 420). Thus, most foreign exchange dealing
today is speculation not motivated by a need for the product obtained but by
the motive of gaining from expected price changes of the currency when it is
resold. Speculation and the seemingly endless circulation of the entities
traded also differentiate other financial markets not only from producer
markets, but also from merchandise and service trading, which is oriented
toward the transportation of goods from one location to another and toward
consumption at the end of the trading chain.
There
is another sense too in which financial markets and the associated institutions
differ from national economies: financial markets tend to be global markets,
and the financial system can arguably be considered a global system. It is, if
you wish, a structure of the world as one place rather than one of national
societies. Economies, on the other hand, have typically been localized; they
are the economies of nation states. They depend on national regulatory
frameworks and institutions, tax and social security systems, national policies
and interventions. They use national currencies and presuppose the existence
of a national central bank. Their localized character is reflected in national
economic indicators and in the attention given to them. Larger economic systems
such as the European Union pose problems for analysts precisely because they do
not correspond to this pattern; European statistics are often problematic since
they average out the internal dynamics of localized economic activities and
their causal dependencies on national frameworks of policymaking. To make
predictions about the European Union’s economic development, analysts tend to
resort to the indicators of leading national economies and to disregard
aggregate statistics that reflect the European level. The global architecture of
financial markets is reflected in their concentration in global centers and
cities (Leyshon and Thrift 1997; Sassen 2001), in the bridgehead construction
of their infrastructure and the global ‘scopic systems’ they employ (Knorr
Cetina, Chapter 2, this volume). All this will become clearer in the first
section of this book. Not all financial markets, one should add, are equally
global. While currency markets are inherently transnational markets, bond and
equity markets are not, though they have become increasingly global in the most
recent wave of globalization. As Sassen shows (Chapter 1, this volume), the
value of cross-border transactions in bonds and equities as a percentage of GDP
in the leading economies was 4% in 1975 in the United States, 35% in 1985 when
the financial era was in full swing, and had risen to 230% in 1998. This share
grew from 5% to 334% in Germany and from 5% to 415% in France.
The
world economy was born with the dawn of international trade, and foreign
exchange trading has played a role in this economy from this time onward. Some
financial transactions are ancient; of others we have had evidence only more
recently. We need to distinguish here between the existence of public debt or of
company shares (with occasional trades) and the emergence of financial markets
and of stock exchanges. Financial securities were well known and privately
owned in the eighteenth century in North America, but they were not traded
(Wright 2001: 21-2). Financial markets can only be assumed to exist when there
are routinized, systematic forms of trading, relatively stable settings, a
minimal degree of standardization of financial securities, and established
cognitive procedures for their evaluation. When stock exchanges emerged they
involved, in addition, agreements about formal rules, an established
organizational structure, and a regulatory framework for exchange activities.
Economic historians agree that informally organized financial markets preceded
stock exchanges and shaped the ways they were set up (Michie 1999: 15). For
that reason, the social and cultural history of financial markets does not
begin with the analysis of the institutional structure and dynamics of
exchanges. One must also investigate forms of interaction, social
relationships, and cognitive and technological patterns that indicate the
existence of more or less informal financial markets.
Sociologists
and economic historians have distinguished at least two patterns of market
emergence. The first pattern, proposed by Max Weber, is that of functional
differentiation. Weber ties the rise of financial markets to the emergence of
modern, large-scale commerce (Weber 2000 [1894]: 306). In the seventeenth
century, wholesale merchants began to exchange certificates of the ownership of
goods and brought only samples to the market. This saved transportation costs
and expanded the circulation of goods. In time, certificates began to be traded
independently of the goods. When early modern states turned to financing their
wars through public debt instead of costly private debt, this innovation gave
financial markets an additional and decisive impetus (Neal 1990; Carruthers
1996: 71). Previous trading in paper certificates facilitated the move to trading
government bonds, which states unloaded on the market. The growth of maritime
trade—a costly enterprise— led to the emergence of joint-stock companies in the
late seventeenth century; their shares added to the supply of trading
instruments.
The
second pattern of market emergence has been proposed by Winifred Barr
Rothenberg, who ties the emergence of financial markets to the separation
between property rights and exchange rights. Rothenberg (2000: 5) shows how in
eighteenth century rural Massachusetts, in a cash-poor economy, in the absence
of a banking network and of other financial institutions, members of rural
communities issued mortgage deeds as financial securities without renouncing
their property rights. The deeds were issued for the sole purpose of exchange;
they were designed to facilitate trades in agricultural products. Over time,
mortgage deeds were traded and accumulated without any reference to the
underlying agricultural products, and a network of informal exchange
relationships was thus established.
In Western Europe, financial markets emerged in the late
seventeenth and early eighteenth centuries in Amsterdam, London, and Paris. The
Paris Bourse was created already in 1724 by royal decree. In contrast, the
London Stock Exchange was not completely institutionalized until 1801 (Michie
1999: 35). The New York Stock Exchange emerged from the ‘Buttonwood Agreement’
of May 17, 1792, by which the participating stockbrokers agreed to ask the same
commission rate on transactions. The first formal stock exchange in North
America was founded in Philadelphia in 1790 (Markham 2002: 115). Before that,
there had been an incipient financial market in Philadelphia in the 1750s, but
on a comparatively modest scale. Initially, financial transactions were conducted
in the street and in the pubs and coffee houses where merchants came together.
After the institutionalization of stock exchanges, the formal market moved
indoors while the informal market continued to trade in the street. This
situation continued until well into the twentieth century. In the nineteenth
century, several formal exchanges existed in parallel in New York city; they
specialized in various classes of securities (oil, mines, cotton, listed or
unlisted, etc.). For most of the nineteenth century, trading in derivatives was
not regulated by law, and was therefore practiced mostly in informal markets.
In the
second half of the nineteenth century, markets underwent a process of
technological remaking. While financial markets had benefited from communication
technologies such as the telegraph and the telephone since the 1840s and the
1870s, respectively, what developed in the 1870s were custom-tailored
technologies for the recording of security prices and for their simultaneous
display in several places. This process was not free of tension; there were
conflicts over the access to market technologies, to financial news, and to
price information. Since then, financial markets have been reshaped repeatedly
by revolutionary new technologies, a process that is ongoing. Several European
stock exchanges have recently become entirely automated; the now empty trading
floors of the Paris Bourse are occasionally used for staging fashion shows. The
technological remake of financial markets in the nineteenth century had a
number of consequences. The introduction of price recording technologies
promoted the standardization of price information. Official price quotations
appeared in London and New York in the late 1860s; with this innovation,
producing business analyses and company statistics became more feasible and
popular. As a further consequence of price standardization, one of the first
market indexes was created by Dow Jones in 1884. Shortly afterward, security
ratings and systematic financial analyses of industrial stocks were introduced.
Technological innovation, along with processes of economic expansion,
urbanization, and international migration have contributed further to the speed
of transactions and the expansion of markets throughout the nineteenth and
twentieth centuries. This expansion has been accompanied by the cross-border
integration of these markets, manifest in the increased speed of capital flows,
the growing interdependence of markets, and their previously mentioned
concentration in global centers.
Economic
sociology, we said, has focused very much on the production side of the
economy. Yet an incipient sociology of financial markets has also emerged since
the 1980s, exemplified by Smith’s work on trading strategies and auctions (e.g.
1981, 1989), Baker’s studies of trading networks (e.g. 1984), Abolafia’s
ethnography of bond traders (1996), and Sassen’s continued work on the location
of financial markets in global cities (e.g. 2001), amongst others (e.g. Lie
1997). The studies collected in this volume extend this tradition and that of
recent or ongoing work not represented in this volume (e.g. Hertz 1998;
Miyazaki 2003; Zaloom 2003). The studies cover a whole spectrum of approaches
focused on the internal working and governance of financial markets, on the
rise of the investor and investors’ concerns, and on the influence financial
markets exert on other areas, for example, on popular culture and the internal
structure of firms.
Section
I, Inside Financial Markets,
looks at the transaction practices in various financial markets, at market
globality, and at mechanisms of market coordination and integration—followed by
a reflexive study of how women fare in this world as reflected in popular
culture. In Chapter 1, The Embeddedness
of Electronic Markets: The Case of Global Capital Markets, Saskia
Sassen addresses the technological transformations behind the emergence of
global markets and the growth of capital flows since the early 1980s—as
indicated by a number of highly telling statistics. These developments ensure,
Sassen argues, the consolidation of an upper stratum of select financial
centers, forming the top layer of the 30-40 global cities through which the
global financial industry operates, and a weakening of national attachments for
the elites and firms which make up the stratum. Yet the global market also
remains embedded in national policies and state agencies in terms of the
guarantees and protections it receives, and by producing norms and cognitions
that become integrated into ‘sound’ national economic policies and standards.
Chapter 2 (Karin Knorr Cetina) poses the question How
are Global Markets Global? The Architecture of a Flow World
with regard to a specific case, that of the foreign exchange markets, which by
all accounts are the most genuinely global and the largest market worldwide in
terms of daily volume of trading. The chapter draws a distinction between
network markets and flow markets, arguing that foreign exchange markets have
become decoupled from networks and exhibit a scopic architecture based on
reflexive mechanisms of observation and projection that project market reality
and enable it to flow. The argument challenges the notion that networks are the
fundamental stuff of which today’s markets (or other forms of new organization)
are made, and the idea that electronic interconnectedness can be equated with
a network form of organization. The chapter also spells out the characteristics
of a flow market. In Chapter 3, How a
Super-Portfolio Emerges: Long-Term Capital Management and the Sociology of
Arbitrage, Donald MacKenzie turns to the actual
trading practices of global arbitrage trading. MacKenzie’s study focuses on
Long-Term Capital Management (LTCM), a hedge fund that had been hugely
successful for several years but was driven to the brink of bankruptcy in
1998. The chapter describes in detail LTCM’s trading strategies, explaining its
failure in terms of a sociological hypothesis: LTCM’s success led to widespread
imitation in the arbitrage community of people who personally knew each other
and who ended up holding overlapping arbitrage positions. Sales by some holders
then led to a cascade of self-reinforcing adverse price movements that
exhausted LTCM’s means to hold out against the losses it incurred. Daniel
Beunza and David Stark (Chapter 4), How to
Recognize Opportunities: Heterarchical Search in a Trading Room,
also look at arbitrage trading, but from the perspective of how a Wall Street
trading room of a major international investment bank is organized for the
process of price discovery. Beunza and Stark conceptualize the trading room as
a kind of laboratory characterized by heterarchy, that is, a flattened
hierarchy where the evaluative principles and information of one trading desk
can be exploited by other desks in a process by which intelligence is
distributed across desks. The authors show how trading involves heterogeneous
principles of valuation and collaborative efforts which have received hardly
any attention hitherto in the literature on trading (but see Heath et al.
1994). Chapter 5 (Jean-Pierre Hassoun), Emotions
on the Trading Floor: Social and Symbolic Expressions,
also focuses on the financial trading floor—from yet another perspective, that
of the role and management of emotions in trading. Drawing extensively on the
metaphors traders use, Hassoun provides a typology of market emotions, which he
associates with the contexts in which emotions emerge—those of performance,
violence, and gaming and gambling. He also discusses the social effects of
these emotions and specifies three ‘registers’ of market activity that range
from the macro- to the micro-level. The final chapter in this section (Chapter
6), Barbara Czarniawska on Women in
Financial Services: Fiction and More Fiction,
provides a reflexive commentary on the way financial markets are exclusionary
and represented in this way in popular culture. Czarniawska compares the
portrayal of ‘exceptional’ women such as the Swedish analyst Elin Friman in
novels and journalistic accounts with that of certain semi-fictitious male
characters in films and autobiographies (examples are the movies Rogue
Trader, which is based on the autobiography of
Nicholas Leeson, who brought down the Baring Bank, and Boiler
Room, a movie based on the story of Michael
Milken, ‘the king of junk bonds’, who was later imprisoned). She finds that
risk-taking women who try their hand at masculine pursuits come to sticky ends
in the plots of such fiction, confirming conventional stereotypes expressed by
male traders when they assert that women have no place in financial markets.
Section
II, The Age of the Investor,
turns from trading and the architecture of markets to the historical and
contemporary construction and selfunderstanding of investors. While
governments, firms, and markets all refer to the investor and conduct their
business in the name of the investor, there are few sociological investigations
of investor attitudes and investment behavior. Chapter 7, by Alex Preda, on The
Investor as a Cultural Figure of Global Capitalism takes
a step toward remedying this situation. Drawing on primary historical sources,
Preda describes the emergence and understanding of the investor in the
eighteenth and nineteenth centuries as one of capitalism’s cultural figures,
comparable to those of the entrepreneur and the capitalist. Preda argues that
investment, originally denounced as a kind of gambling, became legitimate
during the first wave of globalization (1850-1914); it began to be seen as
intrinsic to human nature and a human right regardless of social status. The
process involved a reconfiguration of the investor as a person in possession of
these rights and of certain cognitive and technical skills (a kind of
scientist) that allowed him or her to pursue his or her financial goals in
universally valid and rational ways. These rights continue to play an important
role today—in various governments’ attempt to institute standards of business
that work to the advantage of investors, in legal investigations, and in the
various national and international negotiations over how to make financial
information more transparent. In Chapter 8, The
Values and Beliefs of European Investors,
Werner De Bondt extends the historical analysis to contemporary investor
culture. Using a survey of more than 3,100 affluent and semi-affluent investors
in six Western European countries as a basis, De Bondt shows how investment
strategies and the perceived attractiveness of asset classes are influenced by
the values and beliefs of investors— and by their self-confidence, financial
sophistication, and trust in expert advisors. De Bondt finds that investors’
values and beliefs correlate with national character, gender, age, and religion
and are predictors of portfolio choice and investment strategy. The final
chapter (Chapter 9) in this section is by Richard Swedberg, who writes on the Conflicts
of Interest in the US Brokerage Industry. This
returns to the topic of investor rights, which Swedberg examines in the context
of a case analysis of recent corporate scandals. Swedberg starts from the
sociological assumption that interests are always socially defined or
constructed and that interests can only be realized through social relations.
He shows that interests manifest in these scandals were the outcome of
definitional struggles centered on the notion of ‘general investor interest’,
and that social relations and institutions played a key role in substituting
particular definitions of interests for the general investor interest in
determining the outcomes of these struggles. This analysis differs from the
greed-centered psychological analysis of corporate scandals predominant in
public discourse. Swedberg calls on economic sociology to pay more attention to
the dynamic of interests in economic behavior, arguing, with reference to
Weber, that interests are a dynamizing factor in economic and general behavior.
Section
III, Finance and Governance,
presents two kinds of sociocultural processes: those which mediate and control
market transactions (Chapters 10-12) and those through which financial markets
affect the structure and organizing principles of corporations (Chapters 13 and
14). In Chapter 10, Interpretive
Politics at the Federal Reserve, Mitchel Y.
Abolafia takes the reader into the normally closed meeting room of the Open
Market Committee of the Federal Reserve System. Analyzing meeting transcripts,
Abolafia details the interpretive politics of the Fed during a period of a
major policy change. The chapter identifies the temporal structure of Fed meetings
and the framing moves that participants use to contest existing policy frames
and project new ones. By looking at interpretive politics as an interactional
process that relies on a repertoire of moves, the chapter exemplifies the
social process of meaning construction in finance and provides a template for
the mediating role of interpretive reasoning processes in other areas. In
Chapter 11, The Return of Bureaucracy:
Managing Dispersed Knowledge in Global Finance,
Gordon Clark and Nigel Thrift shift the analysis away from such mediating
interpretive processes to the question of how banks exercise control over
trading rooms and financial market transactions. The authors describe a
bureaucratic process of control through risk management that is dependent upon
assessing dispersed knowledge about market conditions and response within the
firm and across the globe. In financial markets more than in most other kinds
of firms and industries, this kind of bureaucratic control is seen to be
essential to corporate financial integrity and performance; indeed, the authors
argue that it may also be essential to global financial stability. Chapter 12, Enterprise
Risk Management and the Organization of Uncertainty in Financial Institutions,
continues to explore risk analysis, but with a broader focus. Michael Power
shows how new instruments of risk analysis, based in sophisticated financial
metrics, have gained global prominence and are being adopted as regulatory
tools for financial markets by national and international bodies. Power’s
argument is that the rapid rise to success of these tools is not necessarily
due to their technical accuracy, but rather to the fact that they embody a new
conception of the relationship between firms and financial markets (the shareholder
concept of the firm). Power also argues, in line with Clark and Thrift, that
risk analysis tools are adopted to increase the internal control of
corporations. The shareholder concept of the firm is also central to Chapter
13, Managing Investors: How Financial
Markets Reshaped the American
Firm, Dirk Zorn, Frank Dobbin, Julian
Dierkes, and Man-shan Kwok start from the question of what causes large numbers
of firms to change strategy and structure in tandem. They find that the new
model, the shareholder concept of the firm, which emerged between the 1960s and
the 1990s, could not be traced to internal functional demands but came from
institutional investors, financial analysts, and hostile takeover firms which
began to articulate a new ideal that suited the interests of these three
groups. The chapter thus illustrates how professional groups in financial
markets can act as agents of change in an area with which they have little
direct contact by expressing their preferences for firm structure and strategy through
their roles in the market—for example, by lowering the price of firms that did
not abide by the new ideal, recommending against buying stock in them, or
taking firms over and restructuring them themselves. Chapter 14 demonstrates
another aspect of the effect such agents can have on the internal structure of
firms. In Nothing but Net? Networks and Status in
Corporate Governance, Gerald Davis and
Gregory Robbins show that corporate boards seek to appoint well-connected
directors above all when they have a strong need for a display of status—which
is the case when they are owned by institutional investors rather than
individuals, and when they have been the subject of shareholder proposals
suggesting a change in firm governance. By examining a panel of the several
hundred largest US firms observed at four-year intervals over a twelve-year
period, the authors explore these findings in connection with firms’ network
centrality. Central boards are better able to attract central directors and
CEOs of major corporations, but there is no evidence that boards composed of
these individuals enhance subsequent performance (Khurana 2002).
The
intention here is not to present the reader with a single point of view or
argument, but rather to highlight the diversity of theoretical perspectives and
approaches, as well as the complexity of the field. Some topics of research are
just emerging; others are being approached under a new angle. Still others did
not find their way in this book for reasons of space and structure. Nonetheless,
the present book aims to deepen the sociological study of financial markets as
a fundamental domain of modern societies. It hopes to convey to the reader the
intellectual excitement triggered by studying them.