Making sense in asset markets: Strategies for Implicit Organizations

Abstract

While asset markets are traditionally left to economic inquiry, the paper shows that there is both a legal possibility and an incentive for organizing within such markets and for exercising market share-based strategic maneuvering. It proposes, based on sensemaking theory, Implicit Organizations in asset markets to exploit equivocality for momentum trading strategies. An Implicit Organization fulfills the criteria of an organization, while maintaining the image of a perfect market. Its members coordinate via market signals and fixed investment time windows to ensure positive returns to strategic maneuvering in asset markets. In support of hypotheses derived from sensemaking theory, results of empirical studies from two different investment contexts (Xetra and NYSE) provide evidence that equivocal analysts’ recommendations predict investment returns after a fixed time period.

Keywords:

• asset markets
• coordination
• equivocality
• organization
• sensemaking
• signaling

JEL classifications:

• L22
• G12

Public Interest Statement

A still not resolved puzzle in financial economics is the ongoing success of momentum trading strategies in asset markets. As a novel explanation, the paper proposes an Implicit Organization which maintains the image of a perfect market. The paper shows how this is possible via market signals in a legal way. Thus derived theoretical hypotheses are tested and supported empirically in two different investment contexts (Xetra and NYSE). Equivocal or ambiguous analysts’ recommendations predict investment returns after a fixed time period. Thus, the paper challenges the image of a perfectly functioning market of publicly listed assets, which is dominant not only among investors, but also in the general public. Especially under conditions of high equivocality or ambiguity, market explanations have to be supplemented or even replaced through examining coordinated and cooperative sensemaking among market actors.

Cover image

Source: Author

Acknowledgments

I wish to thank the members of the Institute for Economics, the Institute of Organization at Johannes Kepler University, Niels Brunsson, Guiseppe Delmestri, and two anonymous reviewers for their comments on previous versions of the paper.

Notes

1. All of the following arguments also apply for short selling those with selling recommendations, which I will not mention further. Also, I exclude dividends from the discussion here and in the following because of their irrelevance for short-term momentum trading.

Additional information

Funding

Funding. The authors received no direct funding for this research.

Notes on contributors

Johannes M. Lehner

Johannes M. Lehner is an associate professor at the Institute of Organization and Global Management Education, Johannes Kepler University Linz, Austria, where he also did his doctorate and habilitation. He conducted research at several international destinations, such as the University of Toronto, and he regularly acts as a visiting professor at various Latin American universities. His research has been published in International Journals such as Management Science and International Journal of Project Management, Managementforschung, and others. In addition, he (co-)authored several books, and is preparing now the second revised edition of a book on status in organization with Wiley. His theoretical interest is focused on power, status, identity, and sensemaking processes in and around organizations, which he applies to various empirical contexts and phenomena such as strategies, coordination, and decision-making in firms and markets.