Financial Institutions, Information, & Investing-At-A-Distance

Abstract

Seminal papers on the size of the firm emphasise the benefits of in-sourcing over outsourcing services from the market. This provides a rationale for the development of large firms, especially in circumstances of market risk and uncertainty as to the price and quantity of available services. This model is less successful when considering the scope of the firm – what firms do and where they do it, given their assets and the complementarities between related activities. In this paper, we develop a model of the firm that is sensitive to the production and consumption of information (internal and external to the firm). Links are made between what the firm does and where it does it in relation to the information systems that enable firms to reach beyond what they are able to achieve within their own organisations. This model is particularly relevant to financial institutions, many of which face hard-to-realise expectations as to their investment performance. Making good on these expectations depends on the degree to which financial institutions can effectively mobilise information at the margin of markets. In the penultimate section of the paper, we consider the virtues or otherwise of three particular models of investing-at-a-distance. In conclusion, lessons are drawn for the theory and practice of financial intermediation in the context of increasingly distant investment opportunities.

Keywords: Buzz, finance, institutional investors, investment, governance, information, networks, pipelines

JEL Classification: D02, D21, G23, G32