Relationships of collapse: network brokerage, opportunism and fraud in financial markets

Abstract

PurposeThis paper explores the social-behavioral aspects of financial markets. The purpose of this paper is to examine the role of social relations and networks which contributed to the market crash in the US telecommunications sector in the late 1990s.Design/methodology/approachA network theoretic approach is used to examine historical qualitative data. The authors suggest that the network characteristics of financial intermediaries allowed security analysts to control and manipulate information that was disclosed to the investing public.FindingsThe authors find evidence that brokerage locations in the network of actors within the telecommunications market allowed select individuals opportunities to engage in unethical behavior and malfeasance. The authors further highlight the harmful effects of over-embeddedness by illustrating that strong and dense network ties within the financial sector were exploited to distort the flow and reliability of information. The paper concludes with a note on the generalizability of this study and an examination of the current economic-legal structure of Wall Street.Originality/valueRecently, some economists and network scholars have begun examining social relations more thoroughly in the financial sector. This paper is one of the first that focuses specifically on the role and network location of research analysts prior to a market collapse.