Organizational Identity and Regulation-by-Information: Private Securities Rating Enters Government Regulation in American Finance (1900s-1950s)

• In Event: 3134 - Economic Sociology Regular Session: Finance, Markets, and the State

Abstract

The recent 2008 financial crisis drew much attention to rating agencies and the regulatory power of their ratings. Scholars agree that ratings became powerful regulatory mechanisms once they were legally incorporated through government regulations in the 1930s as well as in the 1970s. Rating-dependent regulations spread quickly especially after the United States Securities and Exchange Commission designated certain credit rating agencies—Moody’s, Standard & Poor, and Fitch—as Nationally Recognized Statistical Rating Organizations in 1975. Since then, it is clear that the power of these agencies’ ratings to regulate organizations in finance and participants in capital markets more broadly has increased tremendously. However, there is ambiguity and confusion about why and how exactly did these private ratings get incorporated into government regulations in the first place and then attain such power. Some scholars emphasize the usefulness and practicality of agency ratings given their performance and reputational concerns. Others highlight the role of government agencies and their technocrats in framing alternatives. Recent studies note the relationship between the wider historical context that enabled such regulatory power and the active role played by different actors involved in the financial sector and capital markets, for example, lawyers, courts, government regulators, investment bankers, and most importantly rating agencies themselves. This paper synthesizes and builds on the scattered interdisciplinary literature above by arguing that agency ratings in finance became regulatory thanks to a successful cultural institutionalization process preceding their legal incorporation. Analyzing historical data from newspapers, organizational archives, and congressional records, I argue that institutionalization involved agencies’ adaptation to changing context and their active use of opportunities for doing organizational identity work: crafting the form and identity of their organization and products in a dynamic emergent and divided/fragmented financial field.

Author

• Joris Gjata, University of Colorado, Boulder