A new approach to research and theory development for financial firms-building a “house with windows”

Author:John Holland
Position:Adam Smith Business School, College of Social Sciences, University of Glasgow, Glasgow, UK
Pages:215-242
SUMMARY

Purpose The paper aims to rethink empirical models and theory used in explaining banks and financial institutions (FIs) and to enhance the process of theory construction. This is a provisional response to Colander et al. (2009) and Gendron and Smith-Lacroix’s (2013) call for a new approach to developing theory for finance and FIs. Design/methodology/approa... (see full summary)

 
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A new approach to research and
theory development for
nancial rms-building a
house with windows
John Holland
Adam Smith Business School, College of Social Sciences,
University of Glasgow, Glasgow, UK
Abstract
Purpose The paper aims to rethink empirical models and theory used in explaining banks and nancial
institutions (FIs) and to enhance the process of theory construction. This is a provisional response to Colanderet al.
(2009) and Gendron and Smith-Lacroixs (2013) call for a newapproach to developing theory for nance and FIs.
Design/methodology/approach An embryonic behavioural theory of the nancialrm(BTFF) is
outlined based on eld research about banks and FI rms and relevant literature. The paper explores
conceptual connectionsbetween BTFF and traditional nance theory ideas of nancial intermediation. It
does not seek to integratenancetheory and alternative theory in meta theoryandhas a more modest aim
to improve theorycontent through connections.
Findings The conceptualconnectionsprovide a means to develop ideas proposed by Scholtensand van
Wensveen (2003). They are part of a housewith windowsintended to provide systematic means to take
data from the outside worldwhilst continuously recognising the complexitiesof the context(Keasey and
Hudson, 2007)to both challenge and build the core ideas of FT.
Research limitations/implications The BTFF is a means to create conversationsbetween
academics, practitionersand regulators to aid theory construction. This can overcomethe limitations of such
an embryonictheory.
Practical implications The ideas developed create new opportunities to develop nance theory,
propose changesin banks and FIs and suggest changes in the focus of regulation.
Originality/value Regulators can use the expanded conceptual framework to encourage theory
developmentand to enhance accountability of banks and FIs to citizens.
Keywords Regulation, Theory, Financial rms, Banks, Research
Paper type Research paper
1. Introduction
The paper seeks to rethink empirical models and theory used in explaining banks and nancial
institutions (FIs) and to enhance the process of theory construction. The paper argues that ideas
and assumptions of change, learning, knowledge, social networks and power are implicitly
built into traditional nance theory. This shows the potential for connections between
alternative ideas and nance theories. The change strategy for nance research and theory
construction involves using a combination of empirical and alternative theoretical narratives to
develop a behavioral theory of the nancial rm(BTFF).Thisisused todevelopconceptual
connectionsto traditional nance theory of nancial intermediation (FTFI). The combined
ideas form a more comprehensive explanatory framework for banks and FIs. They provide
means to address some of the problems identied with traditional nance theory and to
develop a strategy for active theory construction.
Research and
theory
development
215
Received29 October 2017
Revised21 January 2018
Accepted14 February 2018
Journalof Financial Regulation
andCompliance
Vol.27 No. 2, 2019
pp. 215-242
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-10-2017-0088
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
Behaviourin the paper refers to actions by nancial rm agents such as learning,
creating knowledge and social resources and mobilising these resources in organisations
and market networks. It also refers to biases and risk-taking behaviour by individuals in
nancial markets as expoundedin behavioural nance theories (Statman, 1999).
The paper explores how nancial rms use social and knowledge resources to create
information, control behaviour and enhance decision conditions when exploiting nancial
resources. They mobilise intangible resources to reduce information asymmetry and
transaction costs. They do this to enhance liquidity management, diversication and risk
management. This creates conditions for nancial intermediation and hence the
transformationof nancial capital and its risks.
This is not an attempt to develop an integrated metatheory. The aims are to position
the ideas about banks and FIs and empirical insights relative to alternative relevant
literature and demonstrate their collective power in interpreting the combined phenomena.
A modest aim is to develop a conversationbetween academics adopting different
paradigms, relativeto shared, common, empirical phenomena.Conceptual connectionscan
provide the basis for connected conversationsand social interactions between many
parties about theory based on differentacademic assumptions and views (paradigms) of the
world (Morgan and Smircich, 1980). Such a conversation is a critical ingredient in theory
construction.
As a result, the paper constitutesan embryonic response to Gendron and Smith-Lacroixs
(2013) call for paradigmatic diversity in nance theory and Colander et al.s (2009) call for
major reorientation in these (nance research) areas and a reconsideration of their basic
premises. The paper develops a strategy to build a house with windowsby proposing
new ways for nance theory to take data from the outside worldwhilst continuously
recognising the complexities of the context(Keasey and Hudson, 2007). It therefore
develops a stream of thought begun by Allen and Santomero (1998) and extended by
Scholtens and van Wensveen(2003),Keasey and Hudson (2007) and Holland (2010).
The new approach can alter the intellectual assumptionson which regulatory actions are
based (Turner, 2009) and provide a new analytical tool for policy makers and regulators.
Regulators must broaden the focus of regulation and regulate change, learning, knowledge
and culture, and not just regulate conduct concerning nancial transactions. They must
focus on knowledge and social resources,not just nancial resources in banks and FIs. They
must stress testmanagement knowledge, nancial rm organisation, culture and
nancials. Theymust do this in an integrated and coherent way.
Section 1 discusses the use of, and problems with, traditionalnance theory in the eld of
banks and FIs. Section 2 outlines a change strategy for research and building theory about
banks and FIs and their agents. This forms a new basis for explaining banks and FIs and
addressing problems. Section 3 develops an empirical narrativefor banks and FIs based
on eld research. Section 4 outlines an embryonicbehavioural theory of the nancial rm
(BTFF). This is based on literature about change and evolution, intellectual capital (IC),
management theory, theory of the rm and sociology of nance literature, matched to
empirical phenomena. In Section 5, the ideas from the BTFF are connected tospecic
nance theories of nancial intermediation. BTFF and connectionsto FTFI must have
responsive, forward-looking elements to create a robust conceptual framework for varying
change conditions. If managers, regulators and academics wish to exploit FTFI, they must
be aware of such dynamics and not use a static version of FTFIby itself. Section 6 explores
how regulators and research councils can use such ideas to drive forward a new change
strategy for research and theory construction, and outlines implications of the paper for
regulation. Section7 summarises the paper.
JFRC
27,2
216

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