Structural Incoherence and Stock Market Activity
Citation: Ezra W. Zuckerman (2004/06) Structural Incoherence and Stock Market Activity. American Sociological Review (RSS)
Internet Archive Scholar (search for fulltext): Structural Incoherence and Stock Market Activity
Download: http://www.jstor.org/stable/3593054 .
Tagged: Sociology
(RSS) categories (RSS), stocks (RSS), valuation (RSS), efficient markets hypothesis (RSS), valuation (RSS), Economic Sociology (RSS)
Summary
Zuckerman hypothesizes that stocks that defy categorization are traded more frequently, at higher volume, and with higher price volatility than stocks that are more easily classified. He validates these hypotheses (all are supported) by looking at market activity just after first-quarter earnings announcements for US firms from 1995 to 2001.
Theoretical and Practical Relevance
Zuckerman draws upon categorization as a theoretical perspective; referring to the likes of Douglas ("Purity and Danger") he claims that "greater trading volume reflects the tendency... for the market to contain more pairs of traders with opposing orientations toward the same asset", and that "When valuing a firm's shares, investors first place that stock in the context of peer firms from the same industry." If we presume, as Zuckerman does, that we make economic decisions based partially upon available classificatory frames, then it's a small leap to the conclusion that in cases of low frame frame availability we would see high volatility, volume and frequency of trading.
Zuckerman is quick to point out that he does not intend to upturn the efficient markets hypothesis; rather, he intends to show that it is not the sole factor governing financial markets. In so doing, he sides clearly with perspectives rooted in economic sociology (e.g. Grannovetter, 1985): our economic decisions are influenced both by a drive for utility maximization (e.g. the best stock at the best price) AND by social structure (e.g. what other kinds of stocks we can compare a potential stock purchase to).
