CAIRN-INT.INFO : International Edition

1In France, in the United States, and in many other countries today, issuing stocks and bonds is the primary source of corporate financing. This is due in part to changes in the regulation of the financial industry starting in the 1970s and 1980s in the United States (Krippner 2011) and Europe (Abdelal 2007), and elsewhere in the 1990s, for example Japan (Amyx 2004), China (Zhu 2009), and India (Reddy 2009). Pension funds, mutual funds, SICAVs, and insurance companies, among others, have gradually collected the savings of the middle classes of wealthy countries so as to allocate them to economic activities throughout the world, guided by the financial valuations produced in particular by rating agencies, investment banks, and brokerage firms. While financial regulation is fragmented in different legal realms, it has nevertheless adopted a common conceptual framework, based on the financial theory that started to be formalized starting in the 1950s. This theory, based on the prevailing liberalism in economic theory (Lebaron 2000), states that when independent “investors” use all of the information available to guide their exchanges, they permit a “market efficiency”, where the price tells the “true value” of the items traded. The truth in pricing would then turn prices into “signals” allowing actors to allocate their capital in an “optimal” manner, both for individual actors and for society as a whole (Lee 1998).

2In most jurisdictions, financial regulation reworks this conceptual framework to distinguish “qualified” or “sophisticated investors,” a category that is mainly used for “institutional investors” or companies in the financial industry (Plihon and Ponssard 2002). Their “sophistication” comes from the fact that their employees have mastered the methods of valuation and investing formalized in financial theory, and have the means to implement them. This knowledge is sanctioned by academic backgrounds and professional diplomas, such as Chartered Financial Analyst. In the United States, these allow a person to dispense with having to pass exams to receive state certification to perform certain tasks, such as providing investment advice. The financial industry is thus at the center of credit distribution. Today, the vast majority of financial flows pass through it, and both the valuation and exchange of financial assets is done by its employees, who act as representatives for the interests of clients who have entrusted them with their funds. This relationship of delegation, which is supposedly legitimized by the differences in mastery of financial theory and the means to implement it, is reinforced, in common law countries, by the fiduciary relationship of the “trust,” which prevents clients from intervening in the delegate’s management of their holdings in the name of the delegate’s expertise (Clark 2000; Montagne 2006).

3The “value” of financial assets is problematized based on their “truth,” which is revealed by prices; it has both a technical and political aspect. Technical, because prices are the result of the methodical application of calculations and evaluations established in the procedures followed by the employees under controlled conditions. Political, because its technical truth justifies the allocation of the resources that come from it as the most optimal for society as a whole. The prices of financial assets are therefore considered to be truths that have to be accepted by government action, as the current debt situation of European countries reminds us, and publically traded companies are obliged to adapt their organization to the “signals” that are sent by the supply and demand of their shares and bonds (Plihon and Ponssard 2002).

4Simmel analyzed how the use of money places the individual in a relationship with “society,” defined as all those who accept the use of money in their exchanges with him or her (Simmel [1900] 1987). The price of an object is both the expression of the individual’s freedom of choice and an act that indicates his or her place in a group that stretches far beyond the individual. For Marcel Mauss, an individual’s social identity is intimately connected to the monetary value of objects that he or she has the right to exchange, with the concepts of “person” and “freedom” being a way to give meaning, within a given society, to an individual’s place in the social hierarchies constituted and legitimized by discourses on money (Mauss [1923-1924] 1995). Following these intuitions, Keith Hart has shown how monetary policies in Europe since the nineteenth century have been built and opposed in terms of problematizing the relationship between isolated individuals and the society as a whole, and they have therefore contributed to giving meaning to the notion of citizenship (Hart 1986; 2000; Dodd 2005).

5Several studies have examined the identities formed by the uses of money in detail, in terms of home purchases (Bourdieu 2000), gifts, inheritance, or divorce settlements that define relationships of love, friendship, or family (Zelizer 1997; 2005). Many studies have also shown that defining objects as subject to a monetary price is a complex social process. Viviana Zelizer has demonstrated how life insurance contracts did not become established until the religious relationship to death in the United States had changed (Zelizer 1979). Comparing two cases in the United States and in France, Marion Fourcade analyzed how giving nature a price, in the case of accidents that cause natural disasters, varies significantly depending on the context (Fourcade 2011). Jane Guyer has analyzed how, in a common social space, in West Africa, scales of measurement and methods of payment can differ depending on the objects and the people involved, with translations from one exchange to another that are not always possible for all participants (Guyer 2004). In this article, I will try to explore the social processes through which publically traded companies are defined as having a monetary “value” that can be problematized in terms of its “truth.”

6The responsibility of employees in the financial industry to tell the “truth” of the financial value thus holds an essential place in the definition of identities and social hierarchies. It is therefore important to analyze in detail how the daily practices of finance industry employees implement the actions of “investors” who find “true” prices in “efficient markets.” I will try to do this here, using observations in the field related to shares of publicly traded companies collected between 2002 and 2004 at Brokers Inc., a brokerage company based in New York, and Acme, an asset management company based in Paris. [1] These companies were established in the past twenty years, in the regulatory movement through which the financial industry reached its current situation. The “sales” team at Brokers Inc. in New York sold financial valuations to investment fund managers, who used them to place the money entrusted to them by their clients. In this setup, the sales team used the valuations produced in France by financial analysts of the mother company, Brokers S.A., while the traders of Brokers Inc. were responsible for buying and selling stocks for managers based in the USA. The activities of these managers were very similar to those of the fund managers employed by Acme and other management companies that I observed in Paris.

7The survey shows that all of the employees, in their valuation procedures and calculations, relied on the concepts of an “investor” trying to maximize his or her capital and of “efficient markets” in relation to which prices are considered to have a “truth” in the “value” of the object in question. However, there is considerable distance between these practices and the liberal utopia that is the source of these concepts. Instead of an open arena of exchanges in which free subjects engage with their own capital, there is a network of commercial enterprises where employees are paid to perform financial valuations for their clients and where the standards for entry are defined in large part by knowledge of financial theory. Employees also rely on different definitions of value that imply divergent understandings of the underlying reality for which prices are supposedly the “truth” and of the ability of prices to represent it.

8These varying approaches are more often than not present in a single valuation procedure, but they are also used to articulate the often contentious relationships between employees and between professions, especially in terms of salary and the legitimacy of the “knowledge” of prices each one produces. In this context, employees mobilize two tensions that are formalized in the financial theory that they use daily. First, despite the sophisticated methods used to establish it, the “value” of a financial asset always remains uncertain, because it is an opinion about the future, which by definition cannot be known in advance. Second, the notion of efficiency carries a more or less contradictory injunction, since on the one hand, if markets are efficient, it is meaningless for investors to produce a valuation that is more appropriate than the price; but, on the other hand, for prices to be “true,” there have to be investors who evaluate them, in other words, who think that the markets are not efficient enough. Financial valuation always implies a bet on the future: you can only hope to profit from buying (or selling) by thinking that the market will “follow” or “correct itself;” for example, by thinking that the “true” value is higher (or lower) than the current price, and that this price, because of its “efficiency,” will come closer to the “true” price in the future.

9The first part of this article will analyze the ways that employees engage with these tensions and with the different forms of valuation in financial theory, as if they were acting as independent “investors.” The second part will show how these same employees also have to assume that the markets are more or less “efficient” at different moments of their procedures and calculations. This leads back to the formalized tensions of financial theory. The third part will examine how employees understand the distributive effects of the financial industry from these concepts, within the constraints and justifications that are considered to be legitimate in the procedural context of their work. Their understanding situates the “truth of the value” of financial assets on both a technical and political level, raising questions about the relationship of “representation” that establishes the place of the financial industry in society today, questions that I will address in conclusion.

I – The “Truth” of Prices as the “Opinion” of an “Investor”

10The sales team, analysts, and traders of Brokers Inc. and the fund managers observed at Acme and elsewhere were under contract to assess listed stocks according to rules related to calculations and procedures. These calculations and procedures were defined from the perspective of an “investor” seeking to maximize his or her earnings, and their implementation was understood as the “representation” of the interests of clients who owned the invested money. The definition of value was always situated in the uncertain territory characterized by issuing a “personal opinion” about the future. Formalized by financial theory, and put into action by the employees, valuation took place through several approaches, some of which were opposed. This diversity was put into practice in the relationships of cooperation and competition between employees, which were understood in part as conflicts between definitions of the “truth of value.”

11According to financial theory, prices “integrate” all available information through the valuations of participants. A standard reference manual in France states:

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Financial theory indicates that in an efficient market, and there is much evidence that all of the major financial markets in the world are close to being characterized as such, all available information on securities, markets, the economy, and so on is quickly reflected in rates. Thus, the rate of an asset is in general very close to its intrinsic or “true value.”
(Jacquillat and Solnik 2002, 1)

13This value, which is also called the “fundamental” value, is defined as the present or actualized value of flows of future revenue that the owner of the good can obtain according to a method called “DCF” or “discounted cash flows” that is taught in every manual and class on financial valuation. Like most brokerage firms and fund management companies, at Brokers S.A., the financial analysts were specialized in a small number of publicly traded companies, with knowledge of their history, their sector of activity and often their directors. They regularly produced documents of between two and ten pages in which they described the company’s prospects, with projections for the upcoming years on the primary components of their accounting statements, such as earnings, operating margins, and turnover, and therefore what a shareholder could expect in terms of dividends, either in liquidities or reinvested in the company. These future flows were “discounted” at a rate that was supposed to represent the “weighted average cost of the capital.” Because of this extensive analysis based on the long term, which took its most formalized shape in the method known as “DCF,” all of the employees observed considered the analysts to be those who knew the valuated, listed company “best.” However, the “truth” of the prices that they were trying to produce remained very hypothetical, because it depended on long-term previsions, which are uncertain by definition, concerning the company and the context of its activity.

14The “truth” of the value differed greatly for the traders of Brokers Inc. and Acme, and they were representative of traders of listed stocks working for other institutional investors. These employees had to follow the buy or sell “orders” issued by the fund managers of their company or by their clients. They could be asked to find the best price of the day (high for selling, low for buying), but also to sell or buy a title at a price close to the average for the day, or within specific limits, for example. In any case, the expertise that justified their salaries and bonuses was their ability to foresee short-term movements of supply and demand, analyzed either as responding to “fundamental” valuations (Tadjeddine 2000) or to other factors such as rumors or mass psychology (Godechot 2001; Preda 2009). [2] This placed traders in an extreme position in relation to the idea that markets are “efficient.” If the “true” value of an asset only depends on the information that is available concerning its present and future, this value can only change with new information, not at each moment, as is the case for the listed price. The valuation of traders is generally qualified as “speculative” because it is less concerned with the “true” value than with the image that the participants in the exchange have of it; their various reasons make it so that the price does not reflect the “fundamental” value but “poorly informed” opinions or “feelings” that can be manipulated – in other words, “false” prices that cannot lead to an optimal allocation of social resources. [3]

15Unlike traders and analysts, the sales team, who were in fact responsible for selling financial analyses to fund managers, were not required to follow a specific approach to value. They took the analysts’ analyses, which they then changed and adapted in a personalized manner for their clients. The sales team sent emails to the managers, left messages on their voicemail, and, rarely, spoke with them on the phone. In these communications, they could use arguments concerning more or less long-term reasons that were “fundamental” or “speculative.”

16Typical clients of Brokers Inc., like the managers of Acme, are assumed to have access to several sources of information to shape their own opinions of the listed stocks that they wanted to buy or sell. They therefore regularly deal with a dozen sales personnel from different brokerage firms. They are often accompanied by analysts of their own company (known as the “buy side”) who have more time to read the documents produced by the brokers (known as the “sell side”). From time to time, a manager would spend more time on the phone with a salesperson to discuss the valuation of stocks more thoroughly. Sales personnel and managers are supposed “to get to know each other” so that they can work out a “fit” [4] or “compatibility” in their dialog that allows the salesperson to have a better understanding of the manager’s “way of thinking.”

17Like other brokerage firms, each salesperson at Brokers Inc. had a budget to invite managers to share in activities that had nothing to do with valuation, like going to the opera, restaurants, or strip clubs. These “outings” were a constant topic of discussion at Brokers Inc. and the director, André, had to approve the budget. While justified in terms of “getting to know each other” and reinforcing common thinking, they ran the risk of tarnishing the company’s image, for example in the case where a manager is not paying for the quality of the analysis supplied by the salesperson, but for the “outings” that he or she proposes. Employees also explained to me that since analysts rarely earned more than $100,000 per year, and often much less, they might consider these activities as “supplementary wages” (Ortiz 2005).

18The intrinsic uncertainty of valuation and the multiple definitions of what constituted its “truth” were stabilized by procedures that made sense for employees like a “personal opinion” both guaranteed and confirmed by its procedural implementation. However, this diversity articulated the conflicts between employees, which also had meaning for them in part as oppositions between ways of telling the truth of value.

19All of the employees, analysts, sales personnel, managers and traders were experts in applying valuation procedures that were understood as the implementation of an independent “investor’s” point of view. These employees were connected by relationships of competition and complementarity, in particular through the system of remuneration, which was articulated in part by the differences in their methodologies and their assumptions about what constituted the “truth” of prices. The earnings of fund management companies come from the commissions paid by their clients, generally in proportion to the volume of funds with which they are entrusted. Fund managers are supposed to be motivated to obtain good performances for their clients because their salaries depend on the amounts that they manage, which should grow with the results. They pay for the financial analysis that the sales team provide them through the work of traders, according to a system that comes from the time when stockbrokers had a monopoly on access to the stock exchange (Godechot and Lagneau-Ymonet 2009). Thus, if John, a manager at Citibank, wants to pay for the analysis that Jacques, a Brokers Inc. salesperson, provides him, he gives the order to Peter, a Citibank trader, to give a buy or sell order to Luke, a Brokers Inc. trader. The only source of revenue for Brokers Inc. is a commission established as a fixed percentage of the amount sold or bought.

20At Brokers Inc., sales personnel had a higher salary and larger bonuses than traders, with analysts much further below. Sales personnel and traders worked in pairs for each manager. Their earnings depended on the personal relationships that sales staff could establish with managers and, to a lesser extent, traders on both sides. Traders on the “buy side” had some latitude to grant part of the transactions to the “sell side” traders of their choice. In each case, the manager alone determined the amount he or she would pay and could end the relationship at any moment, which was supposed to encourage the salesperson to “serve” him or her well. Moreover, like the rest of the financial industry, the executives of Brokers Inc. reserved the right to change bonuses or even eliminate them in cases of serious error instead of using a formula that would assign a fixed percentage depending on the commissions received. Thus, since the bonus amount was not set until it was paid, sales personnel and traders could not know how much they would each receive, but they knew the amount of the commissions on which it was based. The bonuses of analysts and administrative workers at Brokers Inc. and elsewhere depended more on the overall condition of the company’s activities. During my observation, André, forty years old, a senior salesperson and director of Brokers Inc., earned close to $1 million per year, twice the salary of the most senior trader. Jacques, a 28 year-old salesperson who had been increasingly active since being hired two years previously, received an annual salary with bonuses of almost $300,000, which brought him close to Cécile, a 35 year-old senior salesperson whose activity was “stagnating” according to her colleagues and to her own words.

21The hierarchy of salaries implied a hierarchy in the ways financial value was determined. Analysts, whose salaries did not exceed $100,000 per year, felt the most aggrieved, while they were supposed to be the closest to the “true” value of the companies analyzed. Jacques indicated that he did not have the time to develop the different hypotheses present in a “DCF”: [5]

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I would never tell a client: “I think that we should buy because the analyst told me that his or her DCF says that the theoretical price of the company is this much.”

23Nicolas, an analyst at Brokers Inc., complained about this situation because it devalued his expertise:

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No salesperson in the profession talks about the DCF. The DCF is only there because everyone knows that it is the only way to evaluate a company and so it has to be in a report.

25Standardized valuations by analysts could easily be repeated from one employee to another and did not guarantee the loyalty of a manager to a brokerage, unlike the personal approach of the salesperson. Nicolas’ training and salary and those of his assistants at Brokers Inc. were similar to those at other brokerage firms. However, they had a place at Brokers Inc. that reinforced their secondary status in their profession. While salespersons like Jacques sold information produced by the analysts of Brokers SA in Paris, Nicolas worked to support two salespersons who sold information on American companies to managers based in Europe. Hervé, the senior salesperson for whom they worked, explained it to me in an interview:

26I would say that the research of Brokers Inc. on the American market is an alibi for sales or a support for sales, rather than a tool…. [clients] have to justify their choice of a broker, so they have to grade them or at least put comments for different sectors of activity…. So it is no good undermining yourself, if clients are forced to make a choice, by not having the “research” box checked off; that would be bad. Clients can check this box, but they know that we don’t have it to create an appearance of research, because the research is there, but to create a presence.

27While Hervé could think that his clients were interested in his “thinking,” this argument was not shared by the traders. Pascal, a partner in Brokers Inc. and supervisor of two other traders, told me the following about trading in an interview in front of several employees:

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You need experience, not theory, and you can acquire it quickly – you don’t need to be Einstein, you don’t even have to go to school for it, it’s an experience like love [everyone laughs]…. To deal in a stock, you don’t need to know the analysis; it is affected by news about the stock and news on the market. There are no constants, from one day to another, no real accumulated knowledge to preserve about how to trade a stock. If there is a big seller, a takeover, shitty numbers, it can influence prices for one or two weeks, that’s all.

29In every case, employees insisted on the fact that their definition of value came from their individual perspective, corresponding to the central idea of valuation procedures that they come from the independent perspective of an “investor.” These statements were often accompanied by an insistence on their personal involvement in the definition of value, and on the authenticity of the truth stated. Juliette sought to minimize the contribution of analysts in this way:

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It’s up to me to interpret what the analyst says and say whether it’s worth it or not. So I already get rid of a lot. Then, the way that I work, when I tell someone: “you have to buy, you have to sell,” I am convinced myself. Which means that there is some thinking behind it.

31Managers insisted in the same way on their independence from the sales staff. Jacob, a manager for more than ten years in a small management company in Paris, told me:

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I verify, I confirm my information with [the salesperson]; I discuss it with his or her analyst to see if there is anything that I did not see, because the analyst is much closer to the company than I am, but I am always the motor, … the idea comes from me, never from him or her.

33As an aside, however, or as a difficult concession, employees stated that they often relied on the continuity of procedures to affirm a value with which they had no emotional connection, which depended in part on their relationship to their profession as a whole. As Hervé told me:

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There are several ways to go about it, you know; I’m not someone who is systematic so I adapt to the client’s interests. So what I do can be very different…. in the profession of salesperson, what you need, well … it’s a little sad to say, but you have to make your presence felt. And since you can’t call just to say “hi!” you have to call to say something else …

35According to financial theory and its adaptation in regulations, the “truth” of the price is the result of a comparison between independent “investors.” This individual figure gives meaning to the calculations and procedures that the employees have to follow in order to keep their job, each of them using different approaches related to their professional tasks. The legal owners of the funds invested, the clients of fund managers, are considered to be illegitimate due to their lack of knowledge of valuation theories. Their status as valuating “investor” only exists through delegation of this power of assessment to the employees of the financial industry, who take on this role with more or less conviction. At the same time, the employees understand these practices as coming from an “investor” because they represent the interests of their clients through these practices. In this practice of representing interests, competition and the hierarchy of valuations depending on the job title means that the “truth” of valuation for some is always called into question by the “truth” of others. Valuations are also by definition uncertain because they constitute an “opinion” concerning the future. “True” value exists only approximately or in the promise that it could be realized in the market price at an unknown time, and it is only the “personal opinion” of an “investor”, through the relationship of delegation, that establishes the role of employees of the financial industry. In this framework, the practice of the “investor’s” perspective can only be understood in relation to the concept of “efficient markets.”

II – “True Value” as the Revelation of Efficient Markets

36Financial valuation can confirm or deny the efficiency of markets, but it cannot be understood in this professional space without taking a position on it as the fundamental condition of the “truth” of the value represented by the price. On the one hand, all professionals have to position their procedures and calculations in relation to the question of the efficiency of markets and the ways to evaluate what it implies. On the other, since “markets” are essentially constituted of employees of the financial industry, this industry is understood as the only social space where “efficiency” and therefore the “truth of the value” of financial assets, can take place. In all of these cases, however, the valuation of “investors” is necessary to reach efficiency but it becomes superfluous once this efficiency is reached.

37The “efficiency of markets” is a fundamental element in the meaning that calculations and procedures have for employees. This concept is formalized in the theories that they learn at school and that they must call on in the workplace. According to these theories, in the context of the efficiency of markets, prices reflect all of the available information on the earnings that can be expected from shares, and vary depending on new information that has not yet been “integrated.” In a statistical approach, prices are supposed to have a “random” evolution over time and, by construction, the standard deviation of the distribution of earnings over time for a single share is therefore higher than for shares as a whole. It follows that the “best” investment consists of buying “all of the market,” with each share having a weight in investment proportional to its size in the market. As the reference manual quoted above states, using similar expressions:

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Without privileged information, no investment can be favored. A stock portfolio should be as diversified as possible…. Investment strategy is essentially passive, in the sense that it is not helpful to change one’s portfolio constantly to find over- or under-valued stocks…. The logical implication is to construct an investment strategy based on index funds.
(Jacquillat and Solnik 2002, 133)

39Stock indexes were first created at the end of the nineteenth century, and their creators considered that price, like other numerical indicators related to “natural” phenomena, could be a faithful representative of the “law” or the underlying regularity that it showed (De Goede 2005; Muniesa 2007; Preda 2009). The use of statistical tools to calculate the average earnings of shares and the relationships between them has given this approach to investment a “scientific” aura, reinforced by the Nobel Prize for some of its creators (MacKenzie 2006). Thus the “truth” of prices according to the liberal theory of resource allocation through the “markets” was strengthened by the connection made by positivism between mathematical relationships established with numbers and the natural order of the world.

40Following the idea that “markets are efficient,” and taking stock indexes as a representation of them, most investment funds in the financial industry aim to replicate an index or “benchmark” by purchasing the companies that compose it and respecting the weight of each in the whole. At the same time, managers are supposed to “beat the market” by a few percentage points, which contradicts the idea that the market will be “efficient.” They have to use their “personal” valuation to detect shares that they hope will have sufficiently positive or negative results to justify more or less weight in their portfolio than in the index. In the same procedure, the manager is expected to consider that the market is mostly efficient and should be replicated but not entirely, and therefore the fundamental valuation can obtain better results that a simple copy. This approach, called “classic,” does not only apply to investment in stocks. It also applies to global investment strategies. At Acme, as in most companies of this size, a team of mathematicians was responsible for establishing statistical data for all financial assets in the world, taking it as a single “efficient market.” The funds managed were distributed between departments that were defined by asset and, within the departments, by teams and managers defined according to geographic areas and sectors of activity, and according to the approaches to valuation. As in other places, the performances of each manager were compared quarterly to his or her index of reference and to the performances of managers assigned to “beat” the same index in the same company or at other companies.

41This “classic” approach, which is used by the majority of the financial industry, is situated between two extremes. One is the replacement of the valuating personality by a computer program that buys and sells stocks to copy the reference index. It postulates the complete efficiency of the market. The other consists, for example, of certain hedge funds that insist on the personal ability of valuators to “beat” the market. Here the postulate is the reverse: markets are considered to be inefficient. Debates over the regulation of hedge funds, also known as “alternative management,” revolve around the formalized tension in financial theory described above. On the one hand, hedge funds are accused of working against market efficiency, by reinforcing speculative movements that “disconnect” prices from the “true value.” On the other, speculation can be interpreted as an “arbitration” that “corrects inefficiencies” precisely by exploiting them and revealing them to other participants.

42In all of these cases, the concept of efficiency, based on the existence of independent “investors” and denying their existence at the same time, allows employees to give meaning to the multiplicity and to the contradictions in the definition of their tasks and to articulate professional conflicts. Valuation implies a problematizing of the efficiency of markets at different levels: in the choice of the information used, in the type of truth that is sought, and in the justification of the valuating act itself. In fundamental valuation, to perform their valuation, employees constantly had to use the price of assets, for example interest rates or statistics on past prices. In each case, the idea that these prices represented something depended conceptually on the idea that the markets where they occurred were acceptably “efficient.” Moreover, most of the managers who worked with the sales staff of Brokers Inc. applied the “classic” approach. They invested in a fixed list of around sixty stocks, and were specialized in particular by region and by the capitalization [6] of the companies purchased. This list marked the limits of the field of vision of valuation. Integrating an asset into a “market” made so that its value could not only be “fundamental” or “speculative” but also “relative.” To target the interests of a manager, analysts, traders and sales personnel had to compare the analyzed company to the others in the index in which he or she invested, because valuation aimed primarily to play with the relative weight of the shares as a whole.

43Along with the history and situation of the company as well as its fundamental valuation, the documents produced by analysts also present several indicators that relate the actual price of the stock to the company’s accounting data, like its turnover or its gross operating profit. In some cases, the relative valuation, using indicators defined as “comparable,” can become central. The most common indicator is the P/E or “price earnings ratio” that compares prices that are supposed to reflect the actualized future earnings to the company’s current earnings. The higher the P/E in relation to comparable companies, the more “the market” is supposed to consider – “rightly” or “wrongly” depending on the point of view on its “efficiency” – that the earnings that it will provide in the future will be greater than those of its competitors. If a “healthy” company presents a P/E that is weaker than comparable companies in its group, it can be seen as a “good investment.” Thierry, a buy-side analyst at Acme for small capitalization European firms, explained that since there were more than a thousand companies in which the team of managers he worked with could invest, he could not do a fundamental analysis of each one, even though it was his “passion.” He only proposed to include companies in his team’s investments that had already been analyzed by brokers and that had an interesting P/E in their sector. He found the situation “unfortunate,” but he did not see any other solution, due to “lack of time.”

44The concept of an “efficient market” is omnipresent in procedures of valuation. It also allows employees to make sense of their professional space. In the United States, at the time of my observations, and gradually in Europe, a special accreditation was required to perform certain operations in the stock market as an employee, such as advising or buying and selling shares for a third party. Some of these accreditations are acquired automatically by graduating with a degree in financial analysis, like the one granted by the Chartered Financial Analyst Association mentioned above; the Société Française des Analystes Financiers (“French Society of Financial Analysts”) is trying to imitate this role in France. Mastery of financial theory and sanctions by regulating authorities are a powerful barrier to entry into these professions, and reinforce the mutual recognition of employees who only interact professionally on a daily basis with other specialized employees like themselves. They therefore see themselves as the ones who make up the “market” to which regulation gives the social role of defining the “truth” of value.

45The academic trajectory of employees often includes business school, a master’s degree in finance, or a financial analyst degree. [7] The feeling of belonging is reinforced by educational institutions that offer their students the chance to belong to a select group. In the 2011 annual report of the Chartered Financial Analyst Association, you can read the following “testimony” by someone who earned the degree:

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I never thought I’d want to be part of a “club.” That’s not what I had in mind, but I like how it’s turned out. We go to society gatherings and conferences, and it does bring people together. You look at each other and know you’ve all studied the same CFA exams; you’ve done that hard slog, and it’s this thing you have in common…. Being part of this community makes me feel like it is my responsibility – it is our responsibility – not to just blame the market. We are the market. [8]

47The relationship between managers and sales personnel is only one example where mutual recognition of valuation abilities is included in the procedures. To make their predictions about the future, the employees use different types of information on inflation, growth, and changes in a sector, among others. In each case, they rely on information sources from the financial industry, the academic world, and public agencies. The methodologies of production of these sources are standardized and constitute the very notion of the “information” that has to be incorporated into the price. To establish their many indicators, specialized information agencies like Reuters or Bloomberg carry out surveys of professionals. They accumulate perspectives to form a “market consensus.” On the basis of the hypothesis that “the market”, as a whole, produces more reliable information than each isolated individual, analysts use this data to their advantage. At Brokers Inc., for example, Nicolas did the DCF of the companies he analyzed using an Excel file posted online by a New York University professor, and took the consensus published by Bloomberg and Reuters on inflation, growth, and statistical data on the past prices of listed stocks. He explained that it not only simplified his work but also improved its quality, because he based his work on methods and sources of information that were validated by “the market” and therefore closer to the “truth” of prices than he could produce alone.

48This recognition is built on the daily interactions of employees that are necessary for any “personal” valuation. In the case of managers and sales staff, this institutional exchange is extended over time, often beyond the time that they are linked to a single employer. When one of the two changes companies but remains in the same position, it is common for them to continue working together. Brokers Inc. was established through clientele that the three senior salespersons, André, Hervé, and Juliette, had acquired at another investment bank that they “left, taking the clients with them” (Godechot 2007). Even when they change positions, employees have the tendency to keep their contacts, which is a way to “network” and advance their careers. These interlocutors share common or compatible experiences and as a professional space, they form “the market.”

49The various forms of valuation and “truth” that employees are required to produce only have meaning for them, in their calculations and procedures, in relation to a sometimes contradictory problematization of the concept of “efficient markets.” Since valuation is supposed to be the result of “investors” whose perspective is implemented by the employees of the financial industry, this industry is understood, by the employees and by financial regulation, as the social space where “efficient markets” are produced. These markets are not forums open to everyone, but commercial networks with high requirements for entry. However, as we will see in the next section, the employees of the financial industry understand their social role according to the narrative that justifies their daily procedures.

III – The Truth of Value and the Social Role of the Financial Industry

50During my observations at Brokers Inc. and Acme, the financial industry was still under the influence of the rise of index investing and the effects of the “Internet bubble.” These two movements were the object of justifications and questioning by professionals, with a fundamental role given to procedural logics implying the representation of “investors” and the problematization of “efficient markets.” In this context, employees problematized the social role of the financial industry and the notion of “financial crisis” that stems from it.

51The oldest employees of Brokers Inc. noted that their profession had changed since the beginning of the 1990s. Fund managers were following more reference indices, reducing their individual contribution to valuation, and limiting the interest of consulting the personalized valuation of sales personnel. As Juliette put it:

52

When I began, … there were more “boutique” places, two or three people together who built their fund…. It became much more of an industrial process; they standardized asset management, and they became big accounts, with fifty or sixty analysts structured… in general structured by sector [of activity of the listed companies], and things like that…. And then there was a sort of vote, they voted and you were paid depending on the votes you received. Instead of having someone on the phone and telling him or her: “[you] have to buy this idea, … [you] have to buy this stock,” and then he or she buys it and passes you the order [9] right away.

53In this evolution, managers and sales staff, who had a more personalized view of valuation, lost power in relation to traders. The institutional clients of management companies, like insurance companies or pension funds, evaluate managers quarterly, comparing them to their reference index and to other managers. After a few periods of poor results, they can take out their funds and delegate them to another provider. In this context, Yves, head of a team of six managers investing €11 billion in European large capitalizations for Acme, explained that in the strategy to “beat” the index by a few points, trading was essential:

54

In the great years where you make 30%, you don’t care about a 1% difference. But when you are at 1% or 2% since the beginning of the year, and you can sometimes go to 1% in the execution [10] alone, depending on the time of day, then you watch that difference closely! We fight over a few basis points [11] at the end of the year to beat the index! So it has to … no, no, execution is really important. It’s true that if you are really right, over the long term, then no one cares. But this is over two or three years. And today, no one is in a business for two to three years. Business is by quarter and by year, which is very important. Quarterly and annually are what count.

55The increasing importance of index investing, and therefore of trading, for the results of fund managers had a direct impact on the commissions that management companies paid brokers. Since the quality of a trader’s valuation was supposed to have an increased impact on investment performance, “buy side” trading departments had a growing influence on decisions related to the allocation of commissions. “Fundamental” valuation based on the individual perspective of analysts, sales personnel, and managers lost weight compared to “relative” valuation, which is the basis for the construction of stock indices, and compared to the “speculative” valuation of traders. Yves spoke about this tension without a resolution:

56

When it corresponds, it’s fine, and when it doesn’t, we [12] don’t like research, for example, or service, and they [13] give them a lot of money because these people take risks, or give good prices and it causes problems because the message is not really coherent.

57In the development of the index approach, the growing importance attached to the presupposition that markets were “efficient” occurred paradoxically at a time when the bursting of the Internet bubble could have cast doubt on this efficiency. While it has now disappeared from public discussions of finance, in the early 2000s this event was considered to be the worst financial crisis since 1929. The rise in the price of shares of companies related in one way or another to the advent of the Internet began in 1996 and ended with a rapid fall starting in 2000. The price of the most important indices did not reach their level of the mid-1990s again until 2003. In the meantime, several trillions of dollars changed hands by entering and leaving stock markets. The risk of recession caused by the fall in prices was evoked by the President of the Federal Reserve at the time, Alan Greenspan, to justify a radical drop in interest rates. This measure is now seen as partially responsible for the real estate bubble in the United States and the current financial crisis (Jorion 2007).

58During my observations, the “Internet bubble” often allowed employees to justify or criticize professional practices in the very name of what the bubble was supposed to have called into question. Like other “bubbles,” it was attributed to errors in valuation, and even to the irresponsibility of financial sector employees who were responsible for evaluating the listed companies. The concept of “market efficiency,” which was supposed to rely on the independent valuation of “investors,” allowed a connection between positions that could be openly political or moral, according to the reasoning that was found in the liberal theories from which these concepts emerged. The procedural framework of the employees’ activity could therefore be presented as a limit on the social goal of the financial industry, but also as the justification of personal practice. Cécile, salesperson at Brokers Inc., told me in an informal conversation that during the bubble:

59

It was pretty funny, you could say anything, and no matter what, all stocks would go up without anyone knowing why.

60She explained this movement, “funny” in its divergence from the norm, either by the speculative logic of some managers who wanted to buy high and sell even higher, or by the growing obligation for managers to replicate the indices. Yves used the second argument to explain his own positioning. His expertise was in index investing, and it justified his position of responsibility and his salary. He had applied it for many years before reaching a position of responsibility at Acme. However, it made him responsible for his inability to express a personal opinion during the bubble:

61

The problem was that the people who didn’t agree, well, they usually lost their job, … if they were not in the Internet companies, in ‘99-2000, early 2000, they broke their track record, [14] in three months it was finished for three years. It was down to that level. Well, a year later, it started to correct itself, two years later, they were heroes, three years later they had …as for me, I was not … I was not a hero, I mean, I went along with the bubble.

62The inability of employees to act outside of the procedural framework was thus seen as a fault in relation to the injunction of independence of the valuating perspective, which only “heroes” were able to achieve.

63In the cases cited, employees did not try to develop political or moral theories, but used these registers, by allusion, to take positions in a concrete situation, such as the need to justify themselves in the context of an interview with a researcher. Applying the perspective of the free investor and accepting the possible efficiency of the markets can both be used to make contradictory or partially disconnected statements. On the one hand, in the example with Yves, accepting the efficiency of the markets in the procedures he applies and that he makes his subordinates apply by replicating indices is accused of being the cause of the Internet bubble and therefore of inefficiency. On the other hand, the rise in the power of traders, responsible for short-term, speculative valuation, is justified by changes in the procedures that insist on efficiency, which is supposed to eliminate the possibility of “beating” the markets, in particular through speculation. Yet market efficiency and the figure of the investor remain the limit of the meaning of practices, to justify events that employees can only follow in order to keep their position, in a social space organized by the standardized procedures imposed on them.

64In this context, the very notion of “financial crisis” is defined as a situation where efficiency is not reached, but where the solution lies in the ability of the “markets” to continue their work of valuation to define the “true value” for the future. The “bubble” is then only a moment in the market’s search for true value, and the end of the crisis is interpreted as a return to “efficiency.” This logic was suggested by Fernand, the director of allocations at Acme, who was responsible for placing the €300 billion managed by his company in assets throughout the world. As I described above, the work of his department consisted, among other things, of considering the assets of the entire world as a single market in which diversification should be maximized, according to the method based on the idea that it is an “efficient market”:

65

Today, any diversified SICAV manager has the whole world at his or her disposal with a screen that is constantly showing the rates of 25,000 stocks if so desired.

66In this space, the valuating perspectives of employees of the financial industry would allow the “truth” of the valuation through searching to maximize profits by comparing different possible investments:

67

The financial market … imposed the discipline of the hierarchy of returns. Since we manage money for a third party, for pension funds for example, well, we don’t have the right not to invest in companies that have a 25% return on the capital invested, for example in IT, Microsoft, etc., even if you like Michelin, because Michelin is 6% or 7% on the initial capital and 25 is better than 6! … So you had, if you will, a twist in flows of money that went to activities promising 15%, 20%, or 25% returns…. Because people said, “well, yes, after all we don’t know, maybe it’s true,” … and the market was therefore able to persuade and persuade itself that it is both, that there were profits that could attract capital and the capital was happy to be sucked into it. You can see the strength of the system, its ability to hierarchize returns and to impose a real discipline and rigor.

68In this context, the “Internet bubble” can only appear as an element of market efficiency. By implicitly taking up the notion of “searching” that follows prices on their path towards efficiency, Fernand justified the permanence of the social role of the financial industry after the stock market crash that, in his opinion, the industry caused:

69

We could hierarchize, but at the same time we were capable of making mistakes as a group that in hindsight seem improbable, blindness, stupidity, herd mindset, what have you…. The financial industry went too far through its globalization and its self-competitiveness. And I think this is a fundament aspect of this activity. I think that it is not wrong about its tendencies, but it always goes too far. The market didn’t get it wrong; it saw that globalization was a strong revalorization of capital…. So it is true that the financial markets played a … I would say, that in a certain way, they raised the rigor of profitability in the markets, they raised the level of expectations, they required greater transparency of movements, they caused a greater efficiency of capital, as they say, but there were excesses.

70Conceived of as the product of a series of technical operations in a bureaucratic space, the “truth” of prices is also the “truth” of the social value of activities that are capable of being financed, and the “illegitimacy” of those that are set aside. The financial industry is therefore seen as a social space that allows a better allocation of capital in the global space of credit distribution. The notion of a “financial crisis,” defined by the price of assets and their effects on the allocation of credit, renews this meaning of professional practices, and therefore of the “truth of the value” that they are supposed to produce. This value is at the same time technical, as the application of procedures by employees of the financial industry; moral, as an injunction for each employee in accomplishing his or her tasks; and political, as the realization of a project that would ultimately be justified by the common good in the social space, and here the global space over which it extends. “Resolution” of the crisis would therefore only be found in repeating the norm: after the “Internet bubble,” just as after the “financial crisis” of 2007-2008, there is an insistence on “transparency” and on stricter procedures of valuation that are closer to the “truth of the value” that the price is supposed to represent.

Conclusion

71Analysis of the daily practices of valuation in the financial industry shows that they are all defined as the application of the perspective of an independent investor in the omnipresent problematization of market efficiency that is often assumed in procedures. The different approaches to value imply different presuppositions about what it is the “truth” of, presuppositions that express the conflicts between employees and between companies. In financial theory, in regulations, and in situations where employees seek to justify their practices, valuation is involved in the political dimension that is attributed to the financial industry as a distributive system. The “truth” of prices, including in the multiplicity of sometimes contradictory meanings that it can have in professional space, has a “technical” aspect that results from standardized methods formalized in recognized theories and calling on a relationship between numbers and nature that is close to positivism. This “technical” aspect also gives it a “political” character, because the prices are imposed as the truth that is used to guide the allocation of social resources.

72This regulatory logic is at work today, including in the crisis of sovereign debt in Europe, where the “truth” of prices is accepted as a given that is outside the distributive capabilities of political authorities, and one that they have to deal with without being able to influence it. This specific case is part of a more global approach where, for example in the documents of the International Monetary Fund or the World Bank, countries that do not have access to the resources held by the financial industry are obliged to adapt to become part of the investment objects that are worthy of valuation and therefore obtain a portion of the money invested in the market as a whole (Stiglitz 2006). While the bursting of the real estate bubble in the United States was a “crisis,” the inability of many poor countries to finance their development is solely the result of “market efficiency.”

73By regulations, and therefore by the decision of political authorities fragmented into several jurisdictions, the financial industry has been assigned the power to manage the allocation of credit in a global space by representing individual interests in order to contribute to the common good. The possible “truth” of the prices of financial assets plays a fundamental role in this context, because it gives a justification to the inequalities that result from it. It considers “crises” to be “deviations” that confirm, through their negation, the “normality” of the allocation obtained. If we take up the Weberian question of legitimacy, we should note that this role for the financial industry has been constantly expanded from one jurisdiction to another over the past thirty years. The various “crises” have not hindered this movement but, on the contrary, they have been the occasion to strengthen it by means of the “solutions” to which these crises led. The representation of the interests of the money holders by financial employees, and the representativeness of the value of economic activities by the price of shares would thus have legitimacy in the sense that it is given the right to establish social hierarchies through the attribution of credit in a global space where there is no common political institution. With Simmel and Mauss, we may wonder what logics of attachment and respect accompany this movement today. “Politics” in this global space would be defined in part by what the financial industry does in it, and by the meanings it gives to the consequences of its operations.

Notes

  • [1]
    This study took the form of two internships of four to five months in the two companies, with a third internship in a hedge fund consultancy in Paris in 2003, along with almost a hundred interviews, sixty-eight of which were recorded (Ortiz 2008). I then continued my research by obtaining a diploma in financial analysis and teaching finance classes in business schools in France and China between 2008 and 2012. My thanks to Pierre Lascoumes and the anonymous reviewers of L’Année Sociologique for their invaluable corrections and comments. I am, of course, solely responsible for any errors that may remain. In agreement with all those surveyed, the names of the people and companies have been changed to protect their privacy. This paper was written with the financial support of the European Research Council (ERC Starting Grant 263529).
  • [2]
    This has been analyzed for traders in derivatives (Zaloom 2006) and in the foreign exchange market (Knorr Cetina 2005).
  • [3]
    Keynes latched onto this phenomenon to insist on the inefficiency of market finance in allocating resources (Keynes [1936] 1997). Behavioral finance (in France, see Orléan 1999) developed a similar critique that can nonetheless relate to the idea that without “speculation,” “markets” could be “efficient,” an issue for financial regulation that I will analyze below.
  • [4]
    The English word was generally used by all of the employees observed.
  • [5]
    The fundamental method of valuation described above.
  • [6]
    “Capitalization” is the price of all of a company’s stocks and is supposed to represent its size. A manager could therefore specialize in “large capitalization European firms.”
  • [7]
    Karen Ho (2009) has done extensive studies of the ways that major investment banks recruit students from the most prestigious American universities, in particular Princeton.
  • [8]
    CFA Institute, 2011, 2011 Annual Report, annualreport.cfainstitute.org, 24.
  • [9]
    In other words, the stock purchase order, which also implies payment of a commission.
  • [10]
    In other words, the trading.
  • [11]
    A basis point equals 0.01%.
  • [12]
    The fund managers at Acme.
  • [13]
    The traders at Acme.
  • [14]
    In other words, a measure of the distance between the index and its replication by the manager.
English

This article analyzes stock valuation practices, based on participant observation in a brokerage company in New York and in an asset management company in Paris between 2002 and 2004. Financial analysts, traders, sales people and fund managers all use the same financial theory, by following standardized procedures, according to which “value”, defined differently by each profession, is always problematized in relation to its “truth”. Acting in the name of real or potential clients whose interests they are supposed to represent, employees position themselves as “investors” whose interactions would ensue in the creation of “efficient markets”. Employees are bound by relations of competition and complementarity, which are articulated in particular through technical debates about the different definitions of what constitutes the “truth of value”. Yet, just like financial regulation does, they also mobilize arguments according to which the “truth” that would be reflected in prices, is part of a political project in which the financial industry, as the social space of “qualified investors”, is expected to constitute “efficient markets” in order to obtain an “optimal” social allocation of credit. Thus, the financial industry is expected to produce a “truth” in prices, which is both technical and political.

Keywords

  • expertise
  • finance
  • morality
  • politics
  • value
Français

Ce texte analyse les pratiques d’évaluation des actions cotées à partir d’une enquête par observation participante auprès de courtiers à New York et de gérants de fonds à Paris entre 2002 et 2004. Les analystes financiers, traders, vendeurs d’information et gérants de fonds, utilisent tous la même théorie financière, en suivant des procédures standardisées qui définissent la « valeur » de manières différentes selon les professions, mais en la problématisant toujours par rapport à sa « vérité ». Dans ces pratiques, agissant au nom des clients réels ou potentiels dont ils sont censés représenter les intérêts, les employés se positionnent comme « investisseurs », dont les interactions auraient comme résultat la constitution de « marchés efficients ». Les employés sont liés par des relations de compétition et de complémentarité, qui s’articulent notamment à partir d’arguments techniques concernant les différentes définitions de ce qui fait la « vérité de la valeur ». Mais, comme le fait la régulation financière, ils mobilisent aussi des arguments sur le fait que la « vérité », qui serait reflétée dans les prix, fait partie du projet politique qui donne à l’industrie financière, en tant qu’espace social des « investisseurs qualifiés », le rôle de réaliser des « marchés efficients » pour atteindre une allocation sociale « optimale » du crédit. L’industrie financière est ainsi censée produire une « vérité » à travers les prix, qui est à la fois technique et politique.

Mots-clés

  • expertise
  • finance
  • morale
  • politique
  • valeur

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Horacio Ortiz
Center for the Sociology of Innovation, Mines ParisTech, CNRS UMR 7185
Uploaded on Cairn-int.info on 13/05/2014
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