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Investigating the potentially contradictory microfoundations of financialization

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Watson, Matthew. (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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Official URL: http://dx.doi.org/10.1080/03085140902786728

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

Dates:

Date	Event
May 2009	Published

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)

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