The organizing governance structure of a shadow financial market

Since the 1980s, a new market-based financial system has exponentially grown in size and has supplanted the traditional bank-based system as the dominant source of credit and liquidity for the global economy. The growth of this new financial system, however, has not been associated with an expansion in the formal laws and regulations that govern economic action. As a result, large sectors of the economy operate beyond traditional law and regulation, and pose systemic risks to the broader economy and society. The goal of my project is to investigate one of the four major markets in the U.S. shadow financial system—the growing and influential hedge fund market—to uncover what governing mechanisms have been created in the absence of formal regulatory institutions. My investigation uses a systematic application of sociological theory and methods to elucidate both the proximate and distal causes that institutionalize order and governance within hedge fund organizations and the broader organizational field. The empirical data come from 3 years of fieldwork, 40 semi-structured interviews with expert informants in the hedge fund industry, and a comprehensive quantitative database.

The project provides policymakers and federal regulators empirically-based insight into how powerful and opaque financial organizations in the shadow financial system avoid the formal institutional environment, govern in the absence of formal law and regulation, and have created a number of governance failures—which can potentially be mitigated to protect the broader economy and society. At the same time, the project provides sociologists and economists an empirically-based social laboratory to advance a theoretical understanding of how organizations actively construct governance structures within a shadow financial market, how informal governance structures are interrelated with the formal institutional environment, and how the interaction of multiple governance mechanisms converge to create a governing architecture with well-defined governance failures.