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Investigating the potentially contradictory microfoundations of financialization

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Watson, Matthew, 1969-. (2009) Investigating the potentially contradictory microfoundations of financialization. Economy and Society, Vol.38 (No.2). pp. 255-277. ISSN 0308-5147

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Abstract

The existing academic literature on financialization points to multiple instances in which firms attempt to demonstrate the vitality of their stock-market position in ways which ultimately prove to be self-harming. I demonstrate, in the first instance as a matt er of immanent logic, that these actions are linked to the interplay of contradictory tendencies in the microfoundations of financialization. Under conditions of financialization, firms create additional sources of credit to capitalize their productive activities by driving their stock price into greater increases than the market average, thereby generating capital gains. Yet, the more it becomes public knowledge that the financing tricks used to inflate the stock price provide no productive benefit to the firm, the more it would seem to create incentives for fund managers to hold portfolios that replicate the stock market as a whole. In this way, they will minimize their exposure to financial misrepresentation. Such a stance undermines financialized business models, but it does in any case conform to fund managers' basic theoretical training, which revolves around the logical demonstration that an individual stock cannot systematically out-perform the market average. I review the available empirical studies of fund manager decision-making to show that they find against the existence of a simple performativity loop operating between finance theory and fund manager behaviour. However, on many points the empirical evidence does confirm the theoretically derived conclusion concerning the potentially contradictory microfoundations of financialization. Fund managers often do act in a way which is consistent with finance theory's core claim that an index-tracking strategy represents the only equilibrium portfolio, even if this is only rarely as a result of the direct performativity of the theory.

Item Type: Journal Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Politics and International Studies
Library of Congress Subject Headings (LCSH): Stock exchanges, Investment advisors, Capital assets pricing model, Indexation (Economics), Capital gains
Journal or Publication Title: Economy and Society
Publisher: Routledge
ISSN: 0308-5147
Official Date: May 2009
Volume: Vol.38
Number: No.2
Page Range: pp. 255-277
Identification Number: 10.1080/03085140902786728
Status: Peer Reviewed
Access rights to Published version: Restricted or Subscription Access
Funder: Economic and Social Research Council (Great Britain) (ESRC)
Grant number: RES-000-22-2198 (ESRC)
References:

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URI: http://wrap.warwick.ac.uk/id/eprint/1928

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