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Keywords
Abstract
The economic crisis of 20082010 stimulated an already growing sociological interest in nance. Before the crisis, disintermediation and
securitization changed how the U.S. nancial system operated, as bank
operations shifted from the traditional originate-and-hold model to
originate-and-distribute. During the 1980s and 1990s, the overall size
and protability of the nancial system grew as deregulation unleashed
nancial innovation and reorganization. Global shifts toward capital
market integration and liberalization created greater global interdependence. Households in the years before the crisis also altered their
relationship to the nancial system, increasing debt loads and overall exposure to the stock market. Research reveals the importance of politics
for many nancial market developments, various implications for corporate governance, the continuing signicance of social factors within
nance, and the role of theoretical and material devices in shaping nancial practices. Key directions for future research focus on nance
in relation to social inequality, informal sectors, valuation, and social
networks.
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INTRODUCTION
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and lending, but also investing, rating, analyzing, arbitrage, origination, taxing, underwriting, regulating, trading, listing, and hedging.
Not all actors can perform all actions, and they
are selectively paired. For instance, only a member of the New York Stock Exchange can trade
on the exchange, and ratings are done by a small
number of credit rating agencies. Actions are
governed by formal and informal rules, set both
privately and publicly. The Securities and Exchange Commission imposes legal disclosure
requirements on rms that issue publicly traded
securities. But private actors such as the New
York Stock Exchange or the Chicago Mercantile Exchange also impose their own rules on
market participants. And nancial traders often develop informal behavioral norms among
themselves.
Promises form the core of nance. One
party promises to pay a sum of money to
another. Much nancial activity involves, one
way or another, the design, production, distribution, evaluation, acceptance (or rejection),
enforcement, and modication of promises.
Promises can be simple or complex. A simple
loan involves money paid at one point in
time, in exchange for a promise to repay the
money (plus interest) later on. In making such
loans, lenders have to decide if they trust the
borrowers promise, and there are many ways
to make such a determination (Carruthers
2009). Their willingness to lend is tempered by
how uncertain they are about the borrowers
willingness and ability to repay in the future
and by the exposure entailed by the loan.
The evolution of credit decision making has
been a key part in the development of modern
credit economies, but in general lenders try to
mitigate their uncertainty and vulnerability. A
CDO is a highly complex nancial instrument
that combines and structures pieces of many
prior promises and issues new promises that
are grouped into separate tranches (chiey
distinguished from each other by their seniority). Rating agencies such as Moodys are in
the business of evaluating promises and rating
nancial instruments, including CDOs but also
more ordinary corporate bonds. The economic
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signicance of promises has become particularly obvious in the recent nancial crisis, when
so many promises were broken that overall
condence in nancial institutions virtually
disappeared (Swedberg 2010).
Finance is a renewed topic for sociology,
and most research has focused on particular
combinations of the four nancial elements.
For example, Harrington (2008) examines
individual investors in amateur California investment clubs. Uzzi & Lancaster (2003) study
how relations between bank loan managers and
their clients allow each to acquire critical information about the other. Millo (2007) tracks
the recent origin of index-based derivatives
in a nexus of nancial innovation, organized
exchanges, regulation, and nancial theory.
Guseva & Rona-Tas (2001) compare the
Russian and American credit card markets,
whereas Morgan & Prasad (2009) contrast
the development of the French and American
taxation systems. Arrighi (2010) views the rise
of nance capital macroscopically, as a stage
in long-term cycles of capital accumulation
that unfold over centuries. Some nancial
actors (e.g., banks and venture capitalists) have
received more attention than others (e.g., pawn
shops, credit unions, and bank regulatory agencies). Likewise, there is more research on some
activities (e.g., mortgage lending) than others
(e.g., borrowing from loan sharks or rating corporate bonds). Despite many gaps, an expanding mosaic of research uses methods ranging
from old-fashioned ethnography to high-tech
network analysis and draws on many theoretical
traditions. Overall, this mosaic reects a growing appreciation of the sociological signicance
of nancial activities and institutions.
Although interest in nance is rapidly
growing, the sociology of nance draws on
other research. Most obviously, classical sociologists such as Max Weber and Georg Simmel
analyzed banking, money, and nance (Weber
1981, pp. 25466, 27980; Simmel 1978). Like
economic sociology more broadly, the sociology of nance attends to the institutional foundations for nancial markets (Dobbin 2005,
pp. 3340), including law (Swedberg 2003,
MACRO FINANCE
Changes in nance have motivated much recent scholarly attention, and researchers note
various connections to macroscopic processes
such as globalization, deregulation, nancialization, and neoliberalism. The United States
plays a leading role in all these changes and so is
frequently the focus of analysis. One reason for
the attention on nance is simple: By various
measures, the nancial sector of the U.S. economy has grown signicantly in the past several
decades ( Johnson & Kwak 2010, p. 59). The nancial industrys share of GDP increased from
around 15% in 1960 to roughly 23% in 2001,
surpassing manufacturing in the early 1990s.
Finances share of corporate prots also grew
substantially over the same period (Dore 2008;
Guillen & Suarez 2010, p. 260; Krippner 2005,
pp. 17879), and bank prots were particularly
high in the decade before the recent crisis
(Tregenna 2009). Some of those extraordinary
prots have been (unevenly) shared with
employees, and so nancial sector wages rose
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when the Federal National Mortgage Association (Fannie Mae) bundled home mortgages
together and created simple pass-through
securities to sell to investors (Stuart 2003,
pp. 2122, 68). But others securitized different
income streams (accounts receivable, credit
card payments, leasing revenues), and securitization can be done in more complicated ways
to create products such as CDOs (Coval et al.
2009, Benmelech & Dlugosz 2009). Either way,
banks recover their capital sooner (when the securitized loans are sold) rather than later (when
borrowers complete repayment), and so they
are ready to lend again. In effect, securitization
turns bank loans, which are notoriously illiquid,
into marketable securities. It also increases
the amount of money available to borrowers
because investors who would otherwise not
want to lend are often willing to purchase
highly rated securitized loans ( Johnson &
Kwak 2010, pp. 76, 84). It can also, however,
undermine a lenders interest in ensuring that
a borrower is truly creditworthy (Immergluck
2009, pp. 1005). With the originate-and-hold
model, the bank directly suffered if it made a
bad loan. But with the originate-and-distribute
model, banks no longer keep loans in their
own portfolio, and thus the investors who
purchased the loan suffer if the loan goes sour.
The recent nancial crisis has brought several of these trends together. In the early 1980s,
banks and savings institutions dominated home
mortgage lending, but they were supplanted
by market-based lending by the early 1990s
(Adrian & Shin 2010, p. 604). Mortgage origination proved to be extremely protable in the
early 2000s, and as the market for U.S. prime
mortgages became saturated, lenders expanded
into nonconventional mortgages such as Alt-A
and subprime. With strong, worldwide demand
among investors for highly rated securities
(some of it due to regulatory requirements),
mortgage lending expanded dramatically
and became more concentrated at the same
time (Fligstein & Goldstein 2010, pp. 4445;
Rona-Tas & Hiss 2010, p. 146). Foreign
investors were assured not only by the high
ratings issued by Moodys and Standard and
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the efciency and rationality of markets. Growing nancial sectors have become powerful interest groups with considerable political clout
and ready to wield the threat of capital ight
against policies they do not like. Economic sectors that benet from credit ows can also form
a political constituency in favor of particular
credit policies. The housing industry, for example, supports the many ways in which the U.S.
government steers credit into home mortgages.
Corporate nance has also become a
new venue for politics. Although companies
have long had deep connections to politics
(Carruthers 1996), recent decades witnessed the
emergence of new political strategies targeting
corporate ownership via stock markets (King &
Pearce 2010). Various social movements have
embraced divestment as a form of collective action, pressuring high-prole investors (such as
universities and public pension funds) to divest
shares in companies that undertake objectionable policies or produce unwanted outcomes
(Soule 2009). For example, in the 1980s several
American universities divested their portfolios
of the stocks and bonds of companies that did
business in apartheid South Africa (Soule 2009,
pp. 80103). King & Soule (2007) nd that
under certain conditions, protestors targeting
corporations can inuence investors and affect
corporate share prices. Various political agendas have cumulated in the development of socially responsible investing, which subjects investment decisions to explicitly political criteria
(Vogel 2005). A socially responsible investment
fund, for example, will often refuse to invest
in rms that manufacture alcohol or tobacco
products, produce military weapons, or have
poor environmental or labor records. Various
codes now purport to measure the social performance of rms (Chatterji & Levine 2006),
although their validity is sometimes questionable (Chatterji et al. 2009).
The politics of nance vary with the polity.
Although this has been increasingly well
documented as an empirical fact, the overall
connections are not yet fully understood.
Haveman et al. (2007) nd that Progressive Era political developments enabled the
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CONSEQUENCES OF
MACRO FINANCE
The large-scale changes of the last several decades have directly affected ordinary
households. For one thing, nancial assets
constitute a growing proportion of total assets
for households in general, not just for the very
wealthy (Keister 2005, pp. 811, 7172). The
long-term shift from dened benet to dened
contribution pensions, such as 401(k) plans, has
exposed workers ability to accumulate assets
for retirement more directly to the uncertainties of the stock market (Hacker 2002, p. 153;
Shuey & ORand 2004). For instance, many
retirements were postponed after the stock
market decline of 2008, and political interest
in privatizing Social Security has diminished.
Aside from pensions, households have also
increased their involvement in the stock market
through direct share ownership or via mutual
funds and similar investment vehicles (Davis
2008, p. 15; Dynan 2009, pp. 6566). Dore
(2008, pp. 11067) claims that the rise in equity
ownership in the United States and United
Kingdom became explicit policy goals starting
under the Reagan and Thatcher administrations in the 1980s. Regardless of the reason,
many people now have a direct nancial stake
in the stock market, which also gives market
performance greater political salience.
American households have recently become
more vulnerable to credit market conditions
because of their indebtedness (Sullivan 2009).
Median household debt relative to income
grew from 0.14 in 1983 to 0.61 in 2008, and the
median debt service ratio increased from 5%
in 1983 to 13% in 2007 (Dynan 2009, pp. 54,
59). Put another way, the personal savings rate
fell from an average of about 10% in 1980 to
roughly 2% in 2005 (Dynan 2009, p. 51). More
so than in the past, U.S. households spend
more than they earn, maintaining consumption
by accumulating debt. Much of this growth
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Decision making under conditions of uncertainty can produce widespread emulation, such
that decision makers favor whatever course of
action peers are currently pursuing. Bankers
are more likely to get into subprime lending if
everyone else is doing it. And network connections within the community are frequently
the channels through which innovations and
information diffuse. Thus, researchers have
found that institutional investors herd both
into (buying) and out of (selling) the shares of
particular industries (Choi & Sias 2009). Similarly, mutual fund managers are more likely to
buy (or sell) the same stock as other managers
who are located in the same city (Hong et al.
2005). Wall Street analysts also herd by initiating or dropping coverage of NASDAQ-listed
rms when their peers do so (Rao et al. 2001).
Cohen et al. (2007) nd that mutual funds tend
to invest in companies when the mutual fund
manager and corporate board member are embedded in the same educational network, in part
because of joint access to private information.
Although social connectivity can take many
forms, the signicance of concrete social networks and relationships remains a recurrent
theme of many sociological studies of nance.
Venture capital is used to fund small-size highrisk rms (so-called start-ups) operating in
highly uncertain markets such as computer software design and biotechnology. For every successful rm like Microsoft or Google, there are
a thousand failures. Research documents that
Silicon Valley rms and high-tech industries in
other areas are highly networked (Castilla et al.
2000, Castilla 2003, Powell et al. 2005, Stuart
1998, Stuart et al. 1999). A dynamic structure
of relationships linking together law rms, venture capitalists, universities, and start-up rms
allocates capital, propels technological innovation, circulates personnel, and tries to get small
rms to the point where they can seek more
orthodox funding via an initial public offering (Ferrary & Granovetter 2009). Kogut et al.
(2007) show that venture capital networks do
not just agglomerate from the bottom up, but
rather always involve both local and national
connections.
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CONCLUSION
The current crisis accelerated an already
growing sociological interest in nance, and it
conrmed the importance of the topic. As bets
a global phenomenon, the leading research on
nance is done by an international group of
scholars who engage in genuine intellectual
exchange, unlike in many other areas of sociology. Studies of nance have also enabled new
conversations between economic sociology and
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the sociologies of science, culture, law, organizations, and the professions. And nance offers
new ways to develop and extend older, core insights about the importance of social networks
and the embeddedness of nance. Much of the
research is empirically motivated in the sense
that nance has recently changed in interesting
and consequential ways. Finance is also central
to processes such as globalization and connects
directly to the traditional sociological topics of
inequality, politics, institutions, organizations,
and public policy. For some, the growing
salience of technical expertise, combined with
nances higher status and power, activated
sociologys debunking impulse. In the 1990s,
modern nance started to look and sound like
the Great Oz, and sociologists sought for the
curtains to peer behind. Helpfully, the nancial
crisis blew those aside.
We characterize current research as a mosaic chiey because it is more an assemblage
of scholarly activity than a sustained, coherent,
and unitary enterprise. Topics involve particular clusters of actors, activities, contexts, and
rules, and some have been, and will continue to
be, more thoroughly covered than others. One
group of scholars focuses on corporate governance and how rms became beholden to nancial markets and institutional investors, with
an emphasis on shareholder value and shortterm share prices. Another group focuses on
the techniques, methods, and practices of high
nance, studying their adoption and spread,
and viewing their signicance from the perspective of performativity. Several scholars have
imported sociologys traditional focus on social
relationships and networks and used this to illuminate many aspects of nance. And, of course,
many are now diagnosing the current crisis.
Several directions for future research
seem especially promising. On the macronance side, the study of income and wealth
DISCLOSURE STATEMENT
The authors are not aware of any afliations, memberships, funding, or nancial holdings that
might be perceived as affecting the objectivity of this review.
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ACKNOWLEDGMENTS
The authors wish to thank Wendy Espeland and Douglas Massey for helpful comments.
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Annual Review
of Sociology
Volume 37, 2011
Contents
Prefatory Chapters
Reections on a Sociological Career that Integrates Social Science
with Social Policy
William Julius Wilson p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p 1
Emotional Life on the Market Frontier
Arlie Hochschild p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p21
Theory and Methods
Foucault and Sociology
Michael Power p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p35
How to Conduct a Mixed Methods Study: Recent Trends in a Rapidly
Growing Literature
Mario Luis Small p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p57
Social Theory and Public Opinion
Andrew J. Perrin and Katherine McFarland p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p87
The Sociology of Storytelling
Francesca Polletta, Pang Ching Bobby Chen, Beth Gharrity Gardner,
and Alice Motes p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p 109
Statistical Models for Social Networks
Tom A.B. Snijders p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p 131
The Neo-Marxist Legacy in American Sociology
Jeff Manza and Michael A. McCarthy p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p 155
Social Processes
Societal Reactions to Deviance
Ryken Grattet p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p 185
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Formal Organizations
U.S. Health-Care Organizations: Complexity, Turbulence,
and Multilevel Change
Mary L. Fennell and Crystal M. Adams p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p p 205
Political and Economic Sociology
Political Economy of the Environment
Thomas K. Rudel, J. Timmons Roberts, and JoAnn Carmin p p p p p p p p p p p p p p p p p p p p p p p p p p p p 221
vi
Contents
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Contents
vii