The Social Construction of Financial Markets: Institutionalism vs. Market Learning Perspectives on Stock Repurchase Programs
James D. Westphal and Edward J. Zajac
This study advances a social constructionist view of financial market behavior by developing, extending, and testing two contrasting perspectives on whether and how financial
markets learn over time. Drawing from sociological perspectives on institutionalization and economic perspectives on learning, we suggest that the market's conceptualization of particular corporate practices, such as stock buybacks, is less a function of the inherent efficiency or inefficiency of such practices, and more a function of the dominance of a particular ideology and the institutionalization of the practice through cumulative adoption. We begin by proposing that an ideological shift toward an agency perspective on corporate governance led the market to reverse its interpretation of stock buybacks in the U.S. from the late 1970s to the mid-1990s. We then suggest that the emergence of such a dominant ideology also increases the incidence of institutional decoupling over time (i.e., firms' announcing but not implementing stock buybacks), but that contrary to market learning arguments, institutionalization processes limit the extent to which markets are sensitive to observable instances of decoupling. We find support for our hypotheses using extensive longitudinal data on 860 announced stock buybacks over a fifteen-year time span. We conclude that markets can be "taught" by active attempts to establish a dominant ideology that will influence collective perceptions, but that such efforts may paradoxically limit a market's opportunity for subsequent learning. We discuss implications of our findings for institutional theory, market learning perspectives, and research on corporate governance, and conclude by advocating a sociological theory of finance that -- in contrast to economic and psychological perspectives -- emphasizes the influence of macro-level ideologies and institutionalization processes on financial markets.

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