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The Governing Architecture of a Shadow Financial Market: Investigating the Interaction of Legal and Extra-Legal Governance Structures at the Regulatory Event Horizon

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Abstract:
Since the 1980s, the shadow financial system has exponentially grown in size and has supplanted the traditional banking system as a dominant source of credit and liquidity for the U.S. economy. As the 2008 financial collapse revealed, however, the formal institutions of law have a limited role to play in this shadow financial system, and federal regulators have limited authority over the financial organizations within this system. As a result, entire sectors of the U.S. economy operate beyond traditional law and regulation—at the regulatory event horizon—and pose systemic risks to the broader economy and society. My research project consists primarily of a two-stage qualitative investigation—supplemented by social network analysis—into how a governing architecture is being constructed within one of the most influential and powerful markets in the shadow financial system. Specifically, the U.S. hedge fund market is an important social laboratory because it offers qualities of a pseudo-natural experiment wherein the formal regulatory structures that operate in the traditional financial system have been removed, leaving organizations the opportunity to create their own governing architecture. The empirical data come from 3 years of fieldwork and 40 semi-structured interviews with expert informants in the hedge fund industry. The empirical findings are based on qualitative transcript analysis, legal analysis of the relevant statutes and regulations, and social network analysis. The empirical results reveal a complex set of interacting formal and informal governance mechanisms. For example, data analysis revealed that although most hedge funds avoid the formal law and regulation issued by the state, the avoidance of law does not lead to an absence of order within the organizations or the broader organizational field. To the contrary, this formally “unregulated” market is ordered and institutionalized by the interaction of legal and extra-legal governance structures.
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Thesis (Ph.D. -- Brown University (2012)

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Bridges, Todd Arthur, "The Governing Architecture of a Shadow Financial Market: Investigating the Interaction of Legal and Extra-Legal Governance Structures at the Regulatory Event Horizon" (2012). Sociology Theses and Dissertations. Brown Digital Repository. Brown University Library. https://doi.org/10.7301/Z0ZS2TT4

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