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When the Fed Speaks: Arguments, Emotions, and the Microfoundations of Institutions

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This study investigates what happens when a prominent leader explicitly reaffirms the taken-for-granted assumptions underlying an institution. While such efforts are usually made to reinforce the institution, I theorize that they actually destabilize the institution and create collective uncertainty by reopening the very considerations that people take for granted. Using speeches made by the chair of the United States Federal Reserve from 1998 to 2014, I demonstrate that reaffirming the taken-for-granted assumptions underlying the monetary policy framework creates uncertainty in the broader financial market. This market reaction is also influenced by emotions present at the time of the speech that shape how the event is interpreted. Speeches conveyed in an overall more positive tone suppress this reaction, while more fear in the business media amplifies it. Moreover, supplementary analyses conducted on speeches during the financial crisis suggest that when the taken-for-grantedness of these assumptions has weakened, reaffirming them no longer creates uncertainty to the same extent. This study expands our understanding of the consequences of communication in market contexts, raises important questions about the trade-offs between public transparency and market stability, and contributes new insights to research on the cognitive and emotional microfoundations of institutions.
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Administrative Science Quarterly
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DOI: 10.1177/0001839218777475
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When the Fed Speaks:
Arguments, Emotions,
and the Microfoundations
of Institutions
Derek J. Harmon
1
Abstract
This study investigates what happens when a prominent leader explicitly
reaffirms the taken-for-granted assumptions underlying an institution. While
such efforts are usually made to reinforce the institution, I theorize that they
actually destabilize the institution and create collective uncertainty by reopening
the very considerations that people take for granted. Using speeches made by
the chair of the United States Federal Reserve from 1998 to 2014, I demon-
strate that reaffirming the taken-for-granted assumptions underlying the mone-
tary policy framework creates uncertainty in the broader financial market. This
market reaction is also influenced by emotions present at the time of the
speech that shape how the event is interpreted. Speeches conveyed in an
overall more positive tone suppress this reaction, while more fear in the busi-
ness media amplifies it. Moreover, supplementary analyses conducted on
speeches during the financial crisis suggest that when the taken-for-
grantedness of these assumptions has weakened, reaffirming them no longer
creates uncertainty to the same extent. This study expands our understanding
of the consequences of communication in market contexts, raises important
questions about the trade-offs between public transparency and market stabi-
lity, and contributes new insights to research on the cognitive and emotional
microfoundations of institutions.
Keywords: institutions, capital markets, legitimacy, emotion, Federal Reserve
communications
Institutions are built on taken-for-granted assumptions (Berger and Luckmann,
1967) that silently guide our everyday behavior (Zucker, 1977), making our
social interactions more automatic and predictable (DiMaggio and Powell,
1991) and our prevailing institutional arrangements more self-activating and
resilient (Jepperson, 1991). Such assumptions are said to be the subtlest yet
most powerful force underlying the reproduction of our institutions (Suchman,
1995). Yet while assumptions often go without saying, this does not mean they
1
University of Michigan
are never mentioned. Leaders tasked with safeguarding the stability of our
social institutions (Kraatz, 2009) regularly reaffirm these assumptions to rein-
force their influence: corporate executives elaborate on the assumptions under-
lying strategic business plans (Drucker, 1994), professionals reassert the
assumptions that define jurisdictional boundaries (Suddaby and Greenwood,
2005), and top government officials discuss the assumptions that ground pol-
icymaking (Plosser, 2012). What happens to the stability of an institution when
a prominent leader explicitly reaffirms these taken-for-granted assumptions?
Research on the microfoundations of institutions sheds some light on this
question. Scholars in this space have examined the micro-level processes that
influence institutions (Powell and Rerup, 2017), including how individual actors
can tinker with underlying assumptions (Lawrence and Suddaby, 2006). Much
of this research has focused on how actors deliberately try to challenge these
assumptions to change institutions (Seo and Creed, 2002; Munir and Phillips,
2005), but more recent work shows that actors also try to reinforce these
assumptions to maintain the existing social order (Heaphy, 2013). For instance,
scholars have demonstrated how leaders engage in rituals (Dacin, Munir, and
Tracey, 2010) and storytelling activities (Zilber, 2009) to help institutionalized
meanings persist over time. While these forms of maintenance work bolster
and reproduce the prevailing institution, they appear to do so without actually
reaffirming these taken-for-granted assumptions directly.
Given the nature of taken-for-grantedness, however, there are strong theore-
tical reasons to believe that explicitly reaffirming these assumptions may actu-
ally disrupt, rather than reproduce, the prevailing institution. When institutional
assumptions achieve a taken-for-granted status, they take on an objective, nat-
ural, or fact-like quality (Berger and Luckmann, 1967; Garfinkel, 1967). When
this happens, these assumptions become detached ‘‘from the presumed con-
trol of the very actors who initially created them’’ (Suchman, 1995: 583),
obscuring their contingent and social origins (Schutz, 1967; Douglas, 1986) and
making alternative ways of behaving literally unthinkable (Zucker, 1983).
Suchman warned that when assumptions reach this point, ‘‘any overt
attention—including supportive attention—may have the detrimental side
effect of disrupting taken-for-grantedness’’ (1995: 596). Talking openly about
these assumptions brings them to mind, reopening their obscured and contin-
gent origins (Garfinkel, 1967), making them appear less objective or natural,
and revealing to people ‘‘that there are other possible, attractive alternatives’’
(Zucker, 1977: 728) to the current way of doing things. This line of reasoning
suggests that explicitly reaffirming our taken-for-granted assumptions may
actually destabilize the prevailing institution.
To develop this idea, I draw on Toulmin’s (1958) model of argument to pro-
pose that the way speakers structure their arguments maps onto the taken-for-
granted structure of our social institutions (see Harmon, Green, and Goodnight,
2015). Specifically, speakers often make arguments using data and warrants to
convince others of particular claims, all of which are grounded in collectively
understood assumptions—or ‘‘backing’’—that provide the consensual basis
upon which people conduct their ongoing interactions. A key insight of this
study is that Toulmin’s linguistic concept of backing can be mapped directly
onto institutional theorists’ concept of taken-for-granted assumptions. This
insight provides the basis for theorizing and empirically examining the
2Administrative Science Quarterly (2018)
possibility that explicitly reaffirming these taken-for-granted assumptions—or
the backing of an argument—will inadvertently destabilize the institution.
I test this idea in the context of the Federal Reserve, an institution sitting at
the epicenter of the U.S. financial system that, if destabilized, creates uncer-
tainty in the broader financial markets. This empirical setting is noteworthy
because the argument I propose runs counter to the prevailing wisdom of pro-
minent leaders at the Fed, who tend to believe that reaffirming the assump-
tions underlying their monetary policy framework provides more transparency
about the inner workings of this historically secretive institution (Yellen, 2013;
Bernanke, 2015) and that this should reinforce the strength of the institution
and reduce market uncertainty (Plosser, 2012). Given the practical importance
of the market outcome I predict, I also explore factors that might mitigate or
amplify this presumably unintended effect, leveraging research that has argued
emotions shape how audiences make sense of important or uncertain events
in financial markets (Abolafia and Kilduff, 1988; Pfarrer, Pollock, and Rindova,
2010). I focus on how two such factors—the positive tone of Fed speeches
and the level of fear in the business media—shape the way the market inter-
prets the Fed chair’s discussion of these taken-for-granted assumptions.
ARGUMENTS, EMOTIONS, AND INSTITUTIONS
Language and Institutions
Institutional and organization theorists have long recognized that there is a
close connection between language and institutions (e.g., Berger and
Luckmann, 1967). The idea is that institutions somehow get codified in the
way people talk (Garfinkel, 1967; Schutz, 1967), with some meanings naturally
becoming more legitimate than others. As people tend to gravitate toward
things that are more legitimate (DiMaggio and Powell, 1991; Suchman, 1995),
they more readily use these legitimate meanings, thereby perpetuating the
institution in which they reside (Zucker, 1977). But this is a fairly general idea,
and subsequent theorists have tried to find more concrete ways to understand
how specific characteristics of our social institutions relate to the language we
use in everyday life.
The most common approach has been to conceptualize institutions as sys-
tems of statements or words that cohere together—often referred to as voca-
bularies or discourses. Meyer and Rowan (1977) argued that vocabularies form
rationalized accounts that generate isomorphic pressures to conform, and
Kunda (1992) conceptualized a strong culture of normative control as being
based partly on the continued use of certain words that reflect and reinforce
the prevailing culture. Scholars have also demonstrated that people can use
vocabularies and discourses to influence institutions (Suddaby and Greenwood,
2005; Vaara, 2014) and that changes in these systems of words are often asso-
ciated with known changes in prevailing institutions (Fiss and Hirsch, 2005;
Ocasio and Joseph, 2005; Colyvas and Powell, 2006). Recent reviews have
focused on the vocabularies (Loewenstein, Ocasio, and Jones, 2012) and dis-
course perspectives (Phillips and Oswick, 2012), and these ideas are featured
prominently in the institutional logics perspective (Thornton, Ocasio, and
Lounsbury, 2012) and research on the communicative foundations of institu-
tions (Cornelissen et al., 2015).
Harmon 3
One of the most important characteristics of an institution, however, is that
some meanings are more taken for granted than others (Zucker, 1977;
Jepperson, 1991). Scholars have defined institutions as ‘‘taken-for-granted
repetitive social behavior that is underpinned by normative systems and cogni-
tive understandings that give meaning to social exchange and thus enable self-
reproducing social order’’ (Greenwood et al., 2008: 4), and some have high-
lighted this taken-for-granted element as the very essence of an institution
(Phillips and Malhotra, 2017: 400). But the research perspectives on vocabul-
aries and discourses, which excel at explaining how language hangs together
in a coherent system, do not connect our everyday language usage to this
underlying taken-for-granted structure of institutions. I propose that one way to
do this is to examine the underlying structural components of arguments.
Arguments and Institutions
Arguments are a way of reasoning with others. Stephen Toulmin (1958;
Toulmin, Rieke, and Janik, 1984), a British philosopher, established one of the
most authoritative ways to analyze how people use arguments. His approach—
known as the Toulmin Model, as depicted in figure 1—suggests that all argu-
ments contain at least four components: data, warrants, claims, and backing.
At the most basic level, people reason with others by asserting a claim (conclu-
sion) and then justifying it with data (evidence) and warrants (explanations for
why the data support the claim). But Toulmin also recognized a critical fourth
component, pointing out that this basic level of reasoning is always grounded
on collectively understood assumptions—or backing—that provide the ‘‘rules of
the game’’ for how people interact. This observation leads to an important
insight. Although people often leave the backing implicit and talk within the
rules of the game, they can also make the backing explicit and talk about the
rules of the game themselves (Goodnight, 1993; Harmon, Green, and
Goodnight, 2015).
Consider the game of American football, specifically in the context of the
National Football League (NFL). The NFL has many rules, such as when to use
instant replay, which penalties can be called, and even the etiquette its players
should observe. Now consider the public commentary of the league commis-
sioner, the person tasked with safeguarding the integrity of the NFL. Often, the
commissioner will not discuss these rules explicitly and instead focuses on dis-
cussing the activities occurring within the game itself. For instance, he may talk
about why a penalty called last week was correct or how a player is being fined
Figure 1. The Toulmin Model of argument.
Data Claim
Warrant
Backing
4Administrative Science Quarterly (2018)
for flagrant behavior, often elaborating on these claims with more data to
explain what happened. But sometimes the commissioner will step back and
explicitly discuss the rules themselves as a way to reassert their influence;
he may rearticulate the wording of the rule, clarify its intended purpose, or
discuss its origins. In fact, leaders in such positions often shift in their every-
day talk between leaving the backing implicit (i.e., talking within the rules of
the game) and discussing the backing explicitly (i.e., talking about the rules
of the game).
Now consider the context of the Fed, where the game is not football but
United States monetary policymaking, and the commentator is not the NFL
commissioner but the Fed chair. The underlying rules or backing are the
assumptions related to the Fed’s monetary policy framework, which concern
the objectives and conventional tools used to conduct central banking activities
in the United States. The Fed’s objectives, also known as its dual congressional
mandate, are to maximize employment and maintain price stability. To achieve
those objectives, the Fed has long used a variety of conventional tools, like
engaging in open market operations, setting the discount rate, and changing
member banks’ reserve requirements. This framework is largely taken as a
given (Abolafia, 2010), having remained reasonably stable in its current form
since the Federal Reserve Reform Act of 1977. These rules of the game make
up the taken-for-granted assumptions underlying a bounded, specialized dis-
course on U.S. monetary policymaking, the express purpose of which is to sta-
bilize the broader financial system (Board of Governors of the Federal Reserve
System, 2017).
As with the NFL commissioner, the Fed chair’s public speeches can vary in
how explicit they make these assumptions. Some speeches reason within the
rules of the game, making claims about the state of the U.S. economy and pro-
viding economic data as support. For example, in a speech to the Economic
Club of Washington, DC, on December 7, 2009, Chair Bernanke (2009)
asserted a claim about the economic recovery and then provided three pieces
of data to justify it:
A number of factors support the view that the recovery will continue next year
[claim]. Importantly, corporations are having relatively little difficulty raising funds in
the bond and stock markets [data], stock prices and other asset values have recov-
ered significantly from their lows [data], and a variety of indicators suggest that fears
of systemic collapse have receded substantially [data].
In contrast, when the chair talks about the rules of the game, he or she expli-
citly reaffirms the backing, further clarifying the nature or boundaries of mone-
tary policy. For example, in a speech given at the Federal Reserve Bank of St.
Louis on October 11, 2001, Chair Greenspan (2001) made explicit the assump-
tions underlying the Federal Reserve System:
We at the Federal Reserve are given two mandates that are not often spelled out
explicitly. First, to implement an effective monetary policy to meet our legislated
objectives. Second, to do so in a most open and transparent manner in recognition
that we, as unelected officials, are accountable both to the Congress from which we
derive our monetary policy mission and to the American people [backing].
Harmon 5
What I am proposing is that Toulmin’s linguistic concept of backing is literally
the linguistic articulation of an institution’s taken-for-granted assumptions.
Though the backing may not be entirely taken for granted, the key is that it is at
least more taken for granted than the other argument components and,
because of this, may have important implications when made explicit. These
implications are particularly relevant for leaders who regularly reaffirm these
assumptions as one way to reinforce the prevailing institution.
Arguments and Market Uncertainty
If the Fed chair explicitly reaffirming these taken-for-granted assumptions does
in fact reinforce the prevailing institution, such efforts should reduce uncer-
tainty in the broader financial markets. This expectation seems to be consistent
with the beliefs of Fed officials (Yellen, 2013; Bernanke, 2015; Board of
Governors of the Federal Reserve System, 2017), who presume that such
efforts will help bolster confidence in their institution and clarify the implications
of their actions for the markets. But I propose the opposite may be true: expli-
citly reaffirming these taken-for-granted assumptions may not reassert their
influence but instead may disrupt the natural course of things, destabilizing the
institution and increasing overall market uncertainty.
To understand why, first consider what happens when the Fed chair does
not discuss the assumptions or backing underlying the monetary policy frame-
work. Leaving the backing implicit should reinforce the market’s taken-for-
grantedness of these assumptions. As the backing is already collectively under-
stood by the market, the Fed chair not discussing it strengthens the cognitive
legitimacy of these ideas and the notion that they ‘‘go without saying.’’ By rein-
forcing their objective and fact-like status, the chair further obscures the contin-
gent and social origins of these assumptions (Schutz, 1967; Douglas, 1986) and
makes alternative ways of conducting monetary policy and influencing the mar-
ket more unthinkable (Zucker, 1983). The result of these assumptions remain-
ing intact as taken-for-granted facts is that individual market participants are
encouraged to continue deferring as they normally would to ‘‘the way one
always does things,’’ leading to continued ‘‘conformity and isomorphism’’ in
judgments and decisions made in the market (Bitektine and Haack, 2015: 53–
54; Suchman, 1995; Harmon, Green, and Goodnight, 2015). Speeches contain-
ing less backing thus should reinforce the prevailing monetary policy framework
and constrict the overall range of expected directions the market could go in
the future, thereby reducing market uncertainty.
If the Fed chair explicitly reaffirms the backing, however, this will diminish
how much the market takes these assumptions for granted. Bringing these
assumptions to mind should prompt market participants to think about the
foundations of this framework (Bitektine and Haack, 2015; Harmon, Green, and
Goodnight, 2015), endangering their status as taken-for-granted facts
(Suchman, 1995) and revealing to people ‘‘that there are other possible, attrac-
tive alternatives’’ (Zucker, 1977: 728) to the current way of conducting mone-
tary policy. As Garfinkel (1967: 54) explained, once someone modifies ‘‘the
objective structure of the familiar, known-in-common environment by rendering
the background expectancies inoperative,’’ this forces individuals to try to
‘‘manage the reconstruction of the natural facts by [themselves] and without
consensual validation.’’ Diminishing the market’s ability to take these
6Administrative Science Quarterly (2018)
assumptions for granted will reduce market participants’ ability to rely on ‘‘the
way one always does things’’ to make forecasts about the future, producing
greater heterogeneity in the judgments and decisions made in the market.
Thus the more a speech explicitly reaffirms the backing, the more it will desta-
bilize the prevailing monetary policy framework and expand the overall range of
expected directions the market could go in the future, thereby increasing mar-
ket uncertainty.
Hypothesis 1 (H1): The more a Fed chair’s speech explicitly reaffirms the backing
underlying the monetary policy framework, the more market uncertainty will
increase.
Emotions and Market Uncertainty
When important or uncertain events occur in financial markets, emotions can
influence how market participants interpret their meaning (Abolafia and Kilduff,
1988). Two sources of emotion meaningfully affect this process: the emotion
used by the speaker (Green, 2004; Suddaby and Greenwood, 2005) and the
emotion expressed in the broader media (Pollock and Rindova, 2003; Pfarrer,
Pollock, and Rindova, 2010). I consider both in the context of the Fed, paying
careful attention to the emotions the Fed itself has focused on historically
when communicating with the market. I expect that emotions—specifically,
the positive tone of the Fed chair’s speech and the fear expressed in the busi-
ness media—create the interpretative context that shapes how market partici-
pants collectively make sense of the Fed chair’s discussion of these taken-for-
granted assumptions.
Positive tone of a speech. Across a variety of contexts, research has
demonstrated the benefits of communicating in a positive tone. Conveying
information in a positive light leads audiences to rate people’s performances as
better (Levin, 1987), perceive management control systems as stronger
(Schneider, Holstrum, and Marden, 1993), and view organizational practices as
more favorable (Davis and Bobko, 1986). These benefits also appear to hold
when organizations share important information with the financial market.
Davis, Piger, and Sedor (2012) showed that using a positive tone in earnings
press releases produces a better short-term stock market reaction and that this
result holds even after controlling for firms’ characteristics related to fundamen-
tals (Huang, Teoh, and Zhang, 2013). These studies have suggested that con-
veying important information in an overall positive tone focuses market
participants’ attention on more optimistic interpretations of the announcement,
thereby creating greater confidence and certainty about the future.
Market participants also pay attention to the level of positivity in the Fed
chair’s communications (Cruikshank and Sicilia, 1999; Holmes, 2013), and while
the overall positive tone of a speech may influence market evaluations directly,
it may also function as an interpretive context that shapes how market partici-
pants collectively make sense of specific ideas the chair is discussing (Pfarrer,
Pollock, and Rindova, 2010). Hypothesis 1 contends that when the Fed chair
reaffirms the monetary policy framework’s backing explicitly, market partici-
pants are prompted to think of alternatives to the current way of doing things
and will make decisions in increasingly diverging directions. When this
Harmon 7
reaffirmation occurs in a speech with a more positive tone, the positivity should
constrict market participants’ attention to more optimistic alternatives. The
range of expected directions the market could go in the future, which expanded
as the Fed chair talked more about the backing, should be narrowed again due
to the higher levels of positive emotion. Thus the more positive tone a Fed
chair’s speech contains, the more the uncertainty created from discussing the
backing should be suppressed:
Hypothesis 2 (H2): The positive tone of a speech will suppress the market uncer-
tainty created by the Fed chair explicitly reaffirming the backing underlying the
monetary policy framework.
Fear in the business media. The emotion expressed in the broader busi-
ness media can also shape how market participants interpret important and
uncertain events. The ongoing media narrative contributes to what some emo-
tions scholars have called an emotional climate (Menges and Kilduff, 2015),
which can be understood as the prevailing zeitgeist of the market that influ-
ences the attention of market participants. Pfarrer, Pollock, and Rindova (2010)
showed how the emotion expressed about a firm in the media can shape how
investors interpret and react to earnings announcements. In the context of the
Fed, the primary emotion it has historically been most concerned about is fear
(Krugman, 2001; Holmes, 2013), which can create a more pessimistic emo-
tional climate that influences how market participants interpret events (Lerner
and Keltner, 2001; Lerner, Small, and Loewenstein, 2004). Fear is widely
acknowledged as the primary driver of financial panics (Shiller, 1988, 2000;
Holmes, 2013; Bernanke, 2015), the market phenomenon the Fed was estab-
lished to avert.
Existing high levels of fear in the business media may create an especially
problematic context within which to discuss taken-for-granted assumptions
about the Fed. The mechanism at play here is identical to the mechanism for
positive tone, but it works in the opposite direction: while high levels of positive
tone create a more optimistic interpretative context, high levels of fear create a
more pessimistic interpretive context within which market participants make
sense of market events. If H1 is true—if the Fed chair explicitly reaffirming the
framework’s backing prompts market participants to think of alternatives to the
current way of doing things and to make decisions in increasingly diverging
directions—a pessimistic emotional climate should exacerbate this divergence.
The range of expected directions the market could go in the future should
expand even more in an emotional climate of fear, amplifying the uncertainty
created from discussing the backing:
Hypothesis 3 (H3): The fear expressed in the business media at the time of a speech
will amplify the market uncertainty created by the Fed chair explicitly reaffirming
the backing underlying the monetary policy framework.
METHODS
The Fed is the central banking institution of the United States, established in
1913 to protect investors during financial panics by guaranteeing liquidity and
acting as the lender of last resort. Based in Washington, DC, the presidentially
8Administrative Science Quarterly (2018)
appointed seven-member Board of Governors (with one member as the chair)
oversees the 12 regional Federal Reserve Banks and the broader Federal
Reserve System. The Fed’s aim is to maintain confidence and stability in the
financial system through conducting monetary policy, which traditionally has
meant using conventional tools (e.g., deciding to change the quantity of money
in circulation) to manage interest rates. These policy decisions are made eight
times a year by the Federal Open Market Committee (FOMC), a committee
within the Fed consisting of the seven members of the Board of Governors,
the president of the New York Fed, and four of the other 11 regional Federal
Reserve Bank presidents. In the mid-1990s, the Fed chair started to use public
speeches to complement existing monetary policy methods and more actively
manage market expectations (Yellen, 2013; Bernanke, 2015).
Sample
My initial sample consisted of all the Fed chairs’ speeches given between
January 1, 1998 and December 31, 2014, totaling 344. I removed five speeches
because, based on an outlier analysis, their studentized residuals exceeded
plus or minus three. The final sample thus consisted of 339 speeches: 159 by
Alan Greenspan, 166 by Ben Bernanke, and 14 by Janet Yellen.
Dependent Variable
I measured market uncertainty using the change in the Chicago Board Options
Exchange VIX volatility index. The VIX is a daily index calculated ‘‘by averaging
the weighted prices of S&P 500 puts and calls over a wide range of strike
prices’’ (Chicago Board Options Exchange, 2003: 2). It represents options tra-
ders’ estimates of the direction of the S&P 500 over the next month by provid-
ing an aggregate measure of the variance of option prices on any given day.
The higher the variance, the more uncertainty there is in the market. The VIX is
the standard approach finance scholars use to measure market uncertainty
(Connolly, Stivers, and Sun, 2005; Ang et al., 2006; Andersson, Krylova, and
Va
¨ha
¨maa, 2008; Bia’lkowski, Gottschalk, and Wisniewski, 2008). Consistent
with research that has examined the effect of Fed chairs’ communication on
the VIX (e.g., Nikkinen and Sahlstro
¨m, 2004; Chen and Clements, 2007), I used
a two-day event window (t
-1
to t
0
) to measure the change in market uncertainty
on the day of the speech. I identified each speech date from the Federal
Reserve website and validated it with data received from my Freedom of
Information Act Request No. G-2015-00191.
Independent Variables
Backing ratio (BR). The backing ratio measures the relative amount of back-
ing made explicit by the Fed chair in each speech. Together with three busi-
ness school undergraduate students familiar with economics and monetary
policy, I coded each paragraph of each speech as one that either discusses the
backing or does not discuss the backing. I calculated interrater reliability at the
paragraph level (Neuendorf, 2001; Krippendorff, 2003) for the first 60
speeches (Krippendorff’s alpha = .88) and for the last 10 speeches
(Krippendorff’s alpha = .84) to demonstrate consistency. I then used this
Harmon 9
paragraph-level coding scheme to calculate the backing ratio (BR) for each
speech:
BR =number of paragraphs that make the backing explicit / total number of paragraphsð Þ
For a paragraph to be coded as not making the backing explicit, the chair
must have engaged only the structural components of data or warrants to
make claims. He or she need not have engaged all three components. Most
frequently, the chair provided some sort of evidence about actions the Fed
had taken or economic-related metrics it had collected in order to make a
claim about the state of the economy. For instance, in a speech on
September 26, 2005 to the American Bankers Association, Chair Greenspan
(2005) made an initial claim, supported this claim with data, and then reas-
serted the claim:
This enormous increase in housing values and mortgage debt has been spurred by
the decline in mortgage interest rates, which remain historically low [claim]. Indeed,
the thirty-year fixed-rate mortgage, currently around 5 3/4 percent, is about 1/2 per-
centage point below its level of late spring 2004, just before the Federal Open
Market Committee (FOMC) embarked on the current cycle of policy tightening [data].
This decline in mortgage rates and other long-term interest rates in the context of a
concurrent rise in the federal funds rate is without precedent in recent U.S. experi-
ence [claim].
Similarly, in a speech on January 3, 2014 to the American Economic
Association, Chair Bernanke (2014) made an initial claim and then supported it
with a variety of data:
The economy has made considerable progress since the recovery officially began
some four and a half years ago [claim]. Payroll employment has risen by 7 1/2 million
jobs [data]. The unemployment rate has fallen from 10 percent in the fall of 2009 to 7
percent recently [data]. Industrial production and equipment investment have
matched or exceeded pre-recession peaks [data].
For a paragraph to be coded as making the backing explicit, the chair at
some point must have explicitly talked about the backing, which typically
occurred by reaffirming or reiterating the nature and boundaries of monetary
policy objectives and conventional tools. For instance, in a speech on October
18, 2011 at the Federal Reserve Bank of Boston’s 56th Economic Conference,
Chair Bernanke (2011) reaffirmed the Fed’s dual congressional mandate, fol-
lowed by a clarification of how inflation targeting fits into its monetary policy
framework:
The Federal Reserve is accountable to the Congress for two objectives—maximum
employment and price stability [backing], on an equal footing—and it does not have a
formal, numerical inflation target. But, as a practical matter, the Federal Reserve’s
policy framework has many of the elements of flexible inflation targeting. In particu-
lar, like flexible inflation targeters, the FOMC is committed to stabilizing inflation over
the medium run while retaining the flexibility to help offset cyclical fluctuations in
economic activity and employment.
10 Administrative Science Quarterly (2018)
Similarly, in her speech on March 5, 2014 after being sworn in as 15th chair of
the Federal Reserve, Chair Yellen (2014) reaffirmed the core objectives of the
Fed and stated her commitment to achieving them:
The goals set by Congress for the Federal Reserve are clear: maximum employment
and stable prices [backing]. It is equally clear that the economy continues to operate
considerably short of these objectives. I promise to do all that I can, working with my
fellow policymakers, to achieve the very important goals Congress has assigned to
the Federal Reserve [backing].
Speech positive tone. Following existing work (Pfarrer, Pollock, and Rindova,
2010; Rhee and Fiss, 2014), I used the text analysis software Linguistic Inquiry
and Word Count (LIWC) to create an index that captures the relative amount of
positive emotional content in the speech. I used a dictionary approach, whereby
the percentage of words psychometrically related to positive emotion (e.g.,
happy, good, nice, positive, great, favorable, etc.) is reported in relation to all
words in a speech. This positive emotion word dictionary was compiled and vali-
dated by Pennebaker and his colleagues (Pennebaker, Booth, and Francis, 2007;
Pennebaker et al., 2007).
Business media fear. I was granted full access to the Thomson Reuters
Market Psych Indices proprietary database, which calculates a daily measure of
the relative level of fear expressed in the U.S. business media. Every five min-
utes, their algorithms scrape business news media sources (e.g., Reuters, Wall
Street Journal, Financial Times) using a dictionary approach, reporting a daily
measure of the amount of words appearing in these sources psychometrically
related to fear (e.g., worrisome, concerning, anxious, fearful, panicky, etc.) in
relation to all words in the business media discourse. To capture the context of
fear within which market participants interpret the Fed chair’s speech, I con-
structed a business media fear variable by taking the average of this fear index
over a four-day window (t
-3
to t
0
) leading up to and including the day of the
speech.
Control Variables
Market-related factors. I controlled for market conditions that could simul-
taneously influence the backing ratio of speeches as well as changes in market
uncertainty. I controlled for existing market uncertainty prior to the speech by
calculating the 30-day average VIX before the day of the speech. I controlled
for the prior month’s unemployment rate and inflation rate because they are
market indicators of the Fed’s performance. I controlled for expansionary and
contractionary monetary policy conditions by creating two dummy variables
that were coded 1 if the most recent Federal Open Market Committee (FOMC)
meeting resulted in lowering the federal funds rate (i.e., expansionary monetary
policy) or raising the federal funds rate (i.e., contractionary monetary policy).
Because the level of dissent in FOMC meetings might reflect underlying issues
with the monetary policy framework (Plosser, 2015; Hilsenrath, 2016), I con-
trolled for dissent governor and dissent president by counting the number of
dissenting votes from governors and regional presidents at the FOMC meeting
prior to each speech.
Harmon 11
I also controlled for new information that was released into the market on
the same day as the Fed speech. Based on prior work (Ederington and Lee,
1993; Nikkinen and Sahlstro
¨m, 2004), I created dummy variables that were
coded 1 if the Consumer Price Index report,theProducer Price Index report,
and the unemployment report were released on the same day as the speech. I
also controlled for additional information the Fed introduced to the market. I
created a dummy variable for governor speeches if a governor gave a speech
on the same day as the chair, testimony if a member of the Fed testified to
Congress on that day, and press releases if the Fed’s public relations depart-
ment issued any type of press release on that day.
Speech-related factors. I controlled for characteristics of the Fed speech
itself that may correlate with my backing ratio construct and influence market
uncertainty. Consistent with research in financial economics (Spence, 1973;
Van Buskirk, 2012), I controlled for the speech word count. To control for the
level of speech uncertainty, I used the Financial Sentiments Dictionary created
by Loughran and McDonaold (2011). Consistent with the idea that negative
tone can offset positive tone (Pfarrer, Pollock, and Rindova, 2010), I controlled
for speech negative tone using the LIWC software. Based on work that shows
leaders exude a drive for power that influences markets (Winter, 1987; Emrich
et al., 2001), I also used the LIWC software to control for speech power.
I controlled for ‘‘Fedspeak,’’ which former Fed Vice Chair Alan Blinder (2001)
referred to as complex, abstract, or vague language used by Fed chairs to
obfuscate sensitive subjects so as to avoid creating market uncertainty. I con-
trolled for speech complexity by using the Flesch–Kincaid reading grade level
(Kincaid et al., 1975); speech abstractness by using a word dictionary compiled
and validated by Mergenthaler (1996); and speech vagueness by using a partial
dictionary compiled and validated by Hiller and colleagues (1969).
Finally, I controlled for several general aspects of the Fed speech. I created
a dummy variable for the speech location by assigning a 1 to speeches given in
Washington, DC, which is the Fed’s headquarters and the meeting location of
the FOMC. Consistent with work in finance showing that market volatility is
correlated with the day of the week (Chang, Pinegar, and Ravichandran, 1993;
Dubois and Louvet, 1996; Choudhry, 2000; Connolly, Stivers, and Sun, 2005), I
controlled for the day on which the speech took place by creating dummy vari-
ables for each weekday. Based on interviews conducted with former Fed Chair
Ben Bernanke and former Fed Governors Donald Kohn and Mark Olson, I also
controlled for the topic of the speech and the local audience to whom the
speech was delivered. Through an inductive analysis, I identified nine speech
topics—state of the economy, financial crisis, financial literacy, central banking,
banking system, globalization, economic history, commencement addresses,
and remarks on special occasions—and five local audiences—central bankers,
banking industry, government, academics, and laypersons. A research assistant
and I coded all speeches with these nine topics and five local audiences, with
interrater agreement of 99 percent and 100 percent, respectively. I controlled
for these two factors using dummy variables. To summarize, I employed the
following regression model:
ln VIXt=VIXt1
ðÞ=α+βBacking Ratiot+ηControlst+εt
12 Administrative Science Quarterly (2018)
RESULTS
To conduct this event study analysis, I used OLS regression with year fixed
effects to estimate the effect of Fed speeches’ backing ratio on market uncer-
tainty. Descriptive statistics and correlations for all major variables are shown in
table A1 in the Online Appendix (http://journals.sagepub.com/doi/suppl/
10.1177/0001839218777475).
Table 1 reports the results of the OLS regression models. Model 1 is the
baseline model. Model 2 adds the backing ratio as the primary independent
variable of interest. Consistent with H1, I find that the more the Fed chair expli-
citly reaffirms the backing underlying the monetary policy framework, the more
this creates market uncertainty, as graphed in figure 2. To interpret the practical
significance of this effect, recall that the VIX is the expected range that the
S&P 500 will move over the next month. A one-standard-deviation increase in
the backing ratio of a speech (i.e., .22)—which is equivalent to adding six
backing-related paragraphs in a 25-paragraph speech—will increase this
expected range by 1.0 percent. This effect is sizable in two respects. First,
although the VIX is not directly tradeable, one can trade the VXX, which is an
exchange-traded fund highly correlated with the VIX. A $10,000 investment
would hypothetically gross a one-day return of $100 (1 percent). Second, port-
folio managers and investors use the VIX to hedge their risk against market
crashes (Rhoads, 2011). An increase in the VIX of even 1.0 percent makes this
hedging strategy more expensive to execute, thereby influencing how market
participants manage their long-term investment risk.
Model 3 adds the first interaction term between the backing ratio and speech
positive tone. Consistent with H2, I find that the positive tone of the speech
suppresses the market uncertainty created by the Fed chair explicitly reaffirming
the backing, as graphed in figure 3. This means that when a speech’s positive
tone is one standard deviation above its mean, the aforementioned 1.0-percent
increase in the expected range of the S&P 500 over the next month goes away;
in fact, it reduces the expected range by .5 percent. Interestingly, when a
speech’s positive tone is one standard deviation below its mean, this actually
amplifies market uncertainty, increasing the expected range by 3.5 percent.
Model 4 adds the second interaction term between the backing ratio and
business media fear, and model 5 reports the fully specified model. Consistent
with H3, I find that business media fear present at the time of the speech
amplifies the market uncertainty created by the Fed chair explicitly reaffirming
the backing, as graphed in figure 4. This means that the aforementioned 1.0-
percent increase in the expected range of the S&P 500 over the next month is
amplified by 2.5 percent when business media fear is one standard deviation
above its mean. And when business media fear is one standard deviation
below its mean, the aforementioned 1.0-percent increase in market uncertainty
goes away entirely.
Supplemental Analysis on the Financial Crisis Period
The theory developed in this paper seeks to explain the market consequences
of a leader explicitly reaffirming the backing in a context in which the underlying
institutional assumptions are reasonably stable and taken for granted. This was
generally true across the time period examined, as the U.S. monetary policy
Harmon 13
Table 1. Regression Models Predicting Market Uncertainty (t
-1
to t
0
), N = 339*
Variable Model 1 Model 2 Model 3 Model 4 Model 5
Backing ratio (BR) .036
••
.034
••
.045
•••
.041
••
(.018) (.018) (.019) (.019)
Speech positive tone –.006
–.005 –.007
••
–.005 –.007
••
(.004) (.004) (.004) (.004) (.004)
Business media fear –1.616 –1.176 –1.604 .005 –.537
(2.972) (2.925) (2.821) (2.924) (2.863)
BR ×Speech positive tone –.056
•••
–.049
•••
(.020) (.020)
BR ×Business media fear 30.590
•••
26.293
••
(12.626) (12.482)
Existing market uncertainty .000 .000 .000 .000 .000
(.001) (.001) (.001) (.001) (.001)
Unemployment rate .018 .020
.021
.022
••
.022
••
(.011) (.011) (.011) (.011) (.011)
Inflation rate .004 .003 .004 .003 .003
(.006) (.006) (.005) (.006) (.005)
Expansionary monetary policy .003 .005 .006 .003 .004
(.021) (.021) (.021) (.021) (.021)
Contractionary monetary policy .020 .023
.025
.022
.025
(.013) (.013) (.013) (.013) (.013)
Dissent governor .009 .011 .007 .017 .013
(.019) (.019) (.018) (.019) (.018)
Dissent president –.020
•••
–.020
•••
–.018
••
–.017
••
–.015
••
(.007) (.007) (.007) (.007) (.007)
Consumer Price Index report .019 .017 .020 .019 .021
(.015) (.015) (.014) (.014) (.013)
Producer Price Index report .028 .026 .028 .026 .028
(.018) (.018) (.018) (.017) (.017)
Unemployment report –.013 –.015 –.012 –.012 –.009
(.014) (.014) (.014) (.014) (.014)
Governor speeches –.001 –.002 –.002 –.001 –.002
(.007) (.007) (.007) (.007) (.007)
Testimony .019 .018 .024
••
.022
••
.027
••
(.011) (.012) (.011) (.011) (.011)
Press releases –.006 –.006 –.006 –.005 –.005
(.007) (.007) (.007) (.007) (.007)
Speech location –.002 –.001 –.001 –.001 –.001
(.008) (.008) (.008) (.008) (.008)
Speech word count –.000
•••
–.000
•••
–.000
•••
–.000
•••
–.000
•••
(.000) (.000) (.000) (.000) (.000)
Speech uncertainty .002 .001 .000 –.000 –.001
(.004) (.004) (.004) (.004) (.004)
Speech negative tone .009
.007 .007 .006 .006
(.005) (.005) (.005) (.005) (.005)
Speech power –.002 –.004 –.005 –.004 –.005
(.003) (.003) (.003) (.003) (.003)
Speech complexity .001 .000 .000 .001 .001
(.002) (.002) (.002) (.002) (.002)
Speech abstraction –.006
•••
–.006
•••
–.007
•••
–.006
•••
–.007
•••
(.002) (.002) (.002) (.002) (.002)
Speech vagueness –.005 –.003 –.004 –.002 –.003
(.009) (.009) (.008) (.008) (.008)
Constant –.019 –.023 –.026 –.044 –.057
(.094) (.095) (.088) (.090) (.084)
R-squared .310 .318 .340 .339 .355
Adjusted R-squared .170 .177 .201 .199 .216
D.f. 57 58 59 59 60
Average model VIF 4.10 4.11 4.09 4.09 4.07
p<.10;
••
p<.05;
•••
p<.01.
*Results show robust regressions with robust standard errors in parentheses. Significance tests are one-tailed for
directional hypotheses, two-tailed for control variables. All models include year, topic, and local audience fixed
effects.
14 Administrative Science Quarterly (2018)
framework had not been fundamentally changed since 1977, but it was at least
slightly less true during the financial crisis. This period created a substantial jolt
that temporarily dislodged these assumptions from their taken-for-granted sta-
tus. This supplemental analysis seeks to exploit this system jolt as a way to
tentatively extend this story one step further by exploring what happens when
the ‘‘high taken-for-grantedness’’ assumption of my theorizing is relaxed.
When the taken-for-grantedness of institutional assumptions has already been
Figure 2. Main effect of the backing ratio on market uncertainty.
–.01 0 .01 .02 .03
Market uncertainty (predicted values)
0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1
Backing Ratio
Figure 3. Interaction between the backing ratio and speech positive tone.
–.05 0.05 .1
Market uncertainty (predicted values)
0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1
Backing ratio
Low positive tone (–1 SD) High positive tone (+1 SD)
Harmon 15
weakened, which means that their objective and fact-like status has already
been removed, explicitly reaffirming them should not destabilize the institution
and generate uncertainty to the same extent.
To determine the appropriate financial crisis period, I leveraged the narrative
timeline found in former Chair Bernanke’s (2015) memoir that pointed to a
period from 2008 to 2012. In January 2008, the FOMC met for an unscheduled
emergency meeting to reduce the federal funds rate by an enormous 75 basis
points. This unprecedented action marked a key moment when the market
recognized something was truly wrong. I concluded the period at the end of
2012 because the FOMC at this time uncharacteristically made clear how the
Fed would be implementing its framework into the future: it would leave the
federal funds rate exceptionally low at least through mid-2015.
I re-ran model 2 with an additional interaction term between the backing ratio
and a period dummy variable for the financial crisis period, and the interaction
term reaches marginal significance (b=.051, s
2
= .038, p= .088, adjusted
R-squared = .191). This model includes both the financial crisis period dummy
variable and year fixed effects, but removing year fixed effects produces a signifi-
cant interaction (b=.071, s
2
= .036, p= .026, adjusted R-squared = .122). If I
split the sample and run model 2 only on speeches given during the financial cri-
sis period, the main effect results for H1 drop below significance (b= .035, s
2
=
.036, p= .335, adjusted R-squared = .244). This provides preliminary evidence of
an important extension of my earlier theorizing: when the prevailing taken-for-
grantedness of the institution has already been weakened, explicitly reaffirming
these assumptions will have less impact on market uncertainty.
I also considered how this weakened main effect might interact with the
emotions present at the time of the speech. If this main effect is already dimin-
ished during the financial crisis period, then explicitly reaffirming the backing in
the context of an especially optimistic configuration of emotions could
Figure 4. Interaction between the backing ratio and business media fear.
0 .02 .04 .06 .08
Market uncertainty (predicted values)
0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1
Backing ratio
Low media fear (–1 SD) High media fear (+1 SD)
16 Administrative Science Quarterly (2018)
potentially lead to an overall decrease (rather than increase) in market uncer-
tainty. This might be true for speeches given during the financial crisis period
that also contain high amounts of positive emotion and occur when there is a
low level of fear in the business media. To explore this, I further split the sam-
ple of speeches given during the financial crisis to consider only those that con-
tained high positive tone (i.e., above the mean) and low business media fear
(i.e., below the mean). I ran model 2 again on this sample of 48 speeches and
found that the main effect was entirely reversed (b= –.155, s
2
= .063, p=
.022, adjusted R-squared = .363), as graphed in figure 5. This suggests that
when the taken-for-grantedness of the prevailing assumptions has been wea-
kened and the emotional context is highly optimistic, explicitly reaffirming these
assumptions decreases uncertainty.
Endogeneity Considerations
The primary endogeneity concern is that there is an omitted market variable
that simultaneously explains why the Fed discussed the backing and why mar-
ket uncertainty increased on the day of the speech. I attempted to address this
concern in the most direct way possible by controlling for existing market
uncertainty in the 30 days prior to the speech. I also controlled for other factors
related to prevailing market conditions and included year fixed effects. Most
major market considerations should be reflected in at least one of these vari-
ables. Nevertheless, I sought to address endogeneity concerns in three addi-
tional ways to provide further assurance about the robustness of my results.
First, I conducted interviews with Fed officials to gain more insight into the
factors influencing the timing of the speechwriting process and content of the
Figure 5. Main effect of the backing ratio on market uncertainty during the financial crisis,
2008–2012.*
–.15 –.1 –.05 0 .05
Market uncertainty (predicted values)
0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1
Backing ratio
*Includes only speeches with high positive tone given during times of low business media fear.
Harmon 17
speeches in my sample. Most notably, I interviewed Ben Bernanke (Fed chair
from 2005 to 2014), Donald Kohn (Fed governor from 2002 to 2010), and Mark
Olson (Fed governor from 2001 to 2006).
1
The Fed schedules speeches
roughly six months in advance and selects speeches to fulfill commitments to
local audiences and build relationships, not in response to market conditions.
Speeches are written between one and six months in advance, depending on
the type of speech. For speeches that discuss the current outlook of the econ-
omy (i.e., low backing ratio speeches), writing starts a month before so that
the most current economic indicators are used. For speeches that reflect more
on the nature of monetary policy (i.e., high backing ratio speeches), the writing
process begins one to six months before. This means that the types of
speeches that typically contain the most backing are written the earliest.
Equally important is the fact that speeches rarely, if ever, are changed within
one week of the speech date. When changes do occur, they are done primarily
to update specific economic data (i.e., inflation rates, GDP, etc.). Thus the
types of speeches most likely to be changed closer to the speech date are
those least likely to contain high amounts of backing. This information is useful,
because the more time between when my independent variable changes (i.e.,
when the speech is written) and when my dependent variable changes (i.e., on
the day the speech is delivered), the less likely it is that an omitted market vari-
able can explain them both.
So what makes Fed chairs talk about the backing? One key factor suggested
to me by Bernanke during our interview is the local audience who invited the
chair to speak. While the Fed knows that the broader market pays attention to
every speech, the specific message is often written for the local audience, and
there are substantial differences among audiences’ levels of sophistication
about monetary policy (e.g., the Bank of England, an academic institution, or an
awards dinner). To examine this possibility, I correlated the backing ratio with
the five local audience dummy variables included in my analyses. From the
most sophisticated local audience with regard to monetary policy to the least,
the results were central bankers (r = .25), banking industry (r = .11), govern-
ment (r = .00), academics (r = .01), and laypersons (r = –.34). A linear version
of this variable correlates with the backing ratio at .35, meaning that the more
sophisticated the local audience, the more likely it is that the speech discusses
the backing. This relationship is likely because higher levels of sophistication
may be required to understand the complexities and implications of the
assumptions underlying the Fed’s monetary policy framework. This correlation
is higher than the correlation between the backing ratio and any other market
variable in table A1, suggesting that the local audience is a significant driver of
whether or not the Fed discusses these assumptions. Equally important, this
also provides strong support for the construct and measurement validity of the
backing ratio, as it confirms the expectation of Bernanke, the author of many
speeches in my sample. Nevertheless, controlling for the local audience does
not change my results.
Second, I assessed the likelihood that the two different types of market
factors—acute and systemic—could operate as correlated omitted variables in
1
I conducted the interview with Ben Bernanke in person on Feb. 22, 2017 in Washington, DC, and
with Donald Kohn and Mark Olson via telephone on Jan. 27, 2017. Contact the author for additional
information regarding these interviews.
18 Administrative Science Quarterly (2018)
my research design. Acute market factors are instantaneous injections of infor-
mation or emotion into the market, such as press releases and earnings
reports, and are the largest known drivers of my dependent variable. Daily
movements in the VIX are extremely reactive to current events (Bennett,
2016), newly released information (Jamali, 2009), or emotional signals (Tetlock,
2007). But because speeches are written between one to six months in
advance, and high backing ratio speeches are unlikely to be changed anytime
near the speech date, these acute market factors arising on or near the speech
date are extremely unlikely to influence the speechwriting process. Thus
although acute market factors are the most likely drivers of the change in my
dependent variable, they are unlikely to affect my independent variable, thereby
diminishing the likelihood that an acute market factor could be a correlated
omitted variable.
Systemic market factors, in contrast, are prevailing market conditions that can
influence daily market activities indirectly. I controlled for a number of systemic
market variables, but certain factors may not be reflected in these variables and
may be driving my results. I conducted two tests to explore this possibility. The
first test examined the expectation that if omitted systemic market factors were
driving my results and thus driving the Fed to talk about the backing, the backing
ratio of speeches given around the same time should be similar. Examining
speeches given within three days of each another (N = 40 pairs) revealed an aver-
age difference in backing ratio of .21, or roughly one standard deviation, which is
not what one would expect if systemic market factors were driving the Fed to
talk about the backing. The second test examined the possibility that a systemic
market factor driving the backing ratio of speeches simultaneously affected the
daily fluctuations in the VIX. Controlling for the previous average daily changes in
the VIX (i.e., using 1, 10, or 30 days prior to the speech) did not change my
results. Taken together, these observations diminish the likelihood that a sys-
temic market factor could be a correlated omitted variable.
Third, I conducted an empirical test to assess how strong a correlated
omitted variable would have to be to overturn my results (Frank, 2000;
Hubbard, Christensen, and Graffin, 2017). I first calculated the impact threshold
for a confounding variable (ITCV), which is the effect size the omitted variable
would need to have in model 2 to diminish my H1 results below significance.
An omitted variable in my context would have to correlate positively with both
the backing ratio and market uncertainty at .18, which when multiplied together
makes my ITCV equal to .032. To put this in perspective, the size of the
omitted variable needed to invalidate my results is substantially larger than
every other control variable used in existing literature. Assuming that I have
included a reasonable set of control variables, this suggests that my primary
results are not likely driven by a correlated omitted variable. See the Online
Appendix for figure A1, which plots the ITCV along with the effect sizes of all
other covariates in my model, as well as additional robustness checks that
report results consistent with the results reported here.
DISCUSSION
This study set out to investigate what happens when a prominent leader expli-
citly reaffirms the taken-for-granted assumptions underlying an institution.
Using speeches made by the chair of the U.S. Federal Reserve from 1998 to
Harmon 19
2014, I demonstrated that reaffirming the assumptions underlying the mone-
tary policy framework creates uncertainty in the broader financial market.
Despite the robustness of this simple finding, it feels at odds with the lingering
intuition that reaffirming these assumptions should somehow strengthen their
influence and reinforce the existing social order. This is likely what leaders try
to accomplish when making such statements. Why then do I find the
opposite?
The reason is that the institutional assumptions being reaffirmed in my con-
text had achieved a level of taken-for-grantedness that fundamentally altered
their status and influenced the market’s reaction to them being made explicit.
When institutional assumptions are not highly taken for granted, they do not
appear objective or fact-like, and their contingent origins remain visible. Under
such conditions, explicitly reaffirming these assumptions should reinforce and
further institutionalize them. But once these assumptions become taken for
granted, explicitly reaffirming them produces the opposite effect. Such efforts
rip open the fact-like appearance of people’s social world, exposing its under-
lying contingencies and creating uncertainty. Thus my findings are not contrary
to this intuition but rather complementary to it in that together they portray a
more holistic story about the relationship between language and
institutionalization.
Consider the Fed over the last 40 years or so. In 1977, the Federal Reserve
Reform Act created the monetary policy framework that we have today. During
the years immediately following this institutional upheaval, market actors did
not take this framework for granted. Though I cannot empirically validate it
here, I expect that explicit efforts to reaffirm these assumptions during this ear-
lier period would have reinforced this framework. By the 1990s, however, the
assumptions that grounded this framework were largely taken for granted.
Under these conditions, the Fed chair explicitly reaffirming these assumptions
does not reinforce but rather disrupts the institution and creates uncertainty. I
also illustrated that during the financial crisis, when the taken-for-grantedness
of these assumptions had weakened, reaffirming them no longer created
uncertainty to the same extent. My findings therefore depict a consistent the-
ory that demonstrates the close connection between reaffirming one’s
assumptions and the taken-for-grantedness underlying our social institutions.
This study thus demonstrates a simple yet potentially more general principle:
explicitly reaffirming assumptions that are true but taken for granted disrupts
the natural course of things and creates uncertainty. We all hold assumptions
that we take for granted and view as objectively true in a variety of circum-
stances. For this reason, having a teacher announce that ‘‘today, I will not beat
any of my students with a cane if they don’t know an answer’’ does not rein-
force what we believe to obviously be true but instead disrupts the natural
course of things and suggests they could be otherwise. Similarly, an airline pilot
who reassures us when we board that ‘‘the safety checks that we just per-
formed confirm that this plane is safe to fly’’ does not strengthen our confi-
dence in the plane’s safety but rather generates uncertainty by bringing to
mind all the things that could go wrong but normally are not considered. The
power of an institution’s taken-for-grantedness resides in the fact that these
assumptions silently guide the way we think and act, enabling us to move on
and consider other things. Explicitly reaffirming them at this point only disrupts
the natural course of things, revealing the contingencies of our social world.
20 Administrative Science Quarterly (2018)
Beyond Market Signals
My primary finding also appears to be somewhat at odds with signaling theory
(Akerlof, 1970; Spence, 1973), arguably the dominant theory for understanding
how communication influences financial markets (Tetlock, 2007; Graffin,
Carpenter, and Boivie, 2011). According to this approach, information asymme-
tries exist between parties, which creates uncertainty. Prominent leaders, like
the Fed chair, can reduce this uncertainty either by sharing new information
that market participants did not already know or by providing additional clarity
to reduce noise so that market participants can interpret communications more
easily (Connelly et al., 2011). In this context, reaffirming the assumptions that
underlie the monetary policy framework likely does not provide new informa-
tion but presumably would clarify the Fed’s communications, increasing the
‘‘signal to noise ratio’’ (Walsh, 2001; Blinder, 2009; Plosser, 2012) and reducing
uncertainty in the market. This line of reasoning is perhaps why the Fed has
taken drastic steps over the last several decades to be more open and transpar-
ent in its communications (Yellen, 2013; Bernanke, 2015) and why my findings
are potentially counterintuitive for central bankers.
I actually demonstrate strong support for the signaling perspective but in a
different way, as table 1 indicates that longer speeches significantly reduce
market uncertainty. Why do I find support for the signaling perspective in one
sense but not another? Longer speeches generally contain information that
market participants did not have beforehand, which should decrease informa-
tion asymmetries between the Fed chair and market participants and reduce
uncertainty. But not every word of a speech contains new information.
Financial economists have generally assumed that such non-informational com-
munication will produce no market effect (Tetlock, 2007), while others have
suggested that reaffirming existing knowledge can clarify people’s interpreta-
tions and still reduce uncertainty (Blinder, 2009). But the theory developed in
this paper suggests that some efforts to add clarity can backfire if the ideas
being reaffirmed have achieved a taken-for-granted status. My theory thus
complements the signaling perspective by explaining how more complex and
socially embedded forms of communication operate in financial markets.
My findings also complement the signaling perspective with respect to the
role of emotions in market contexts. Emotions are commonly viewed as signals
(Tetlock, 2007) that contain a positive or negative valence that directly influ-
ences the market’s reaction. In contrast, this study portrays emotions as an
interpretative context within which collective-level meaning making occurs.
This portrayal is consistent with recent work by Pfarrer, Pollock, and Rindova
(2010), who argued that celebrity firms have a positive emotional aura around
them created by the media that influences how investors react when the firm
announces earnings surprises. My findings extend their work in at least two
important ways. First, I theorize and demonstrate that emotional contexts can
be either positive or negative in valence yet shape market participants’ interpre-
tation in similar ways: a context created by high (or low) levels of positivity
shapes people’s interpretations in a similar way as a context created by low (or
high) levels of fear. Second, I show that emotional contexts can be created not
only by the media but also by the speakers, who can deliberatively establish a
safer context within which to make potentially disruptive comments. Thus this
study proposes a single theoretical mechanism to explain how two different
Harmon 21
types and sources of emotion influence people’s interpretations, providing
insight into how collective-level emotions function in market contexts (Menges
and Kilduff, 2015).
Transparency, Stability, and Hegemony
This study also raises important questions about the trade-offs between the
growing trend toward public transparency and the stability of our markets,
social institutions, and broader financial system. My findings demonstrate that
one powerful way leaders try to create transparency in their communication—
by openly discussing the assumptions that ground their decisions and
actions—can disrupt the very institution they intend to safeguard. Some have
called this ‘‘the transparency paradox,’’ when a well-intentioned push for
greater transparency produces unintended consequences, prompting us to re-
visit the potential benefits of privacy (Bernstein, 2012). The Fed has struggled
with this trade-off for decades. Historically, it preferred secrecy for fear that the
markets would overreact to information people did not understand. In recent
decades, the Fed has become decidedly more transparent (Yellen, 2013;
Bernanke, 2015), but the challenge of balancing the ever-increasing market
demands for transparency against its goals for maintaining market stability is
only growing. My findings highlight one specific way in which this trade-off
manifests in everyday central banking communication.
This trade-off is not limited to central bankers. The same issues confront
most of our civic leaders, from Supreme Court justices to presidents, who reg-
ularly need to balance transparency with secrecy when communicating with
their stakeholders. These considerations extend to corporate executives too,
who regularly communicate with investors (Lounsbury and Glynn, 2001;
Martens, Jennings, and Jennings, 2007), securities analysts (Lee, 2015), other
firms (Harmon, Kim, and Mayer, 2015), and employees (Rousseau and
Tijoriwala, 1999) and presumably want to enhance clarity without inadvertently
creating uncertainty. How and when should these leaders be transparent? My
findings suggest at least a few preliminary guidelines. First, how they are trans-
parent matters. Executives might consider sharing more information or stories
that stay ‘‘within the rules of the game,’’ thereby increasing transparency while
still silently reinforcing people’s taken-for-granted assumptions. Second, lead-
ers should also pay attention to the emotional context within which they com-
municate. If they need to be more transparent about taken-for-granted
assumptions, they can ensure that discussing them does not create uncertainty
by either encasing these statements within more positive language or postpon-
ing the discussion until a prevailing pessimistic climate passes.
These considerations raise several questions about the relationship between
public transparency and the stability of the broader financial system. Because
markets are culturally contingent (Fligstein and Calder, 2015), one can imagine
that the optimal balance between transparency and secrecy might depend on
what audiences take for granted (Lamin and Zaheer, 2012). More work needs
to be done to understand the effects of audience heterogeneity embedded
within increasingly complex financial systems (Greenwood et al., 2011). In addi-
tion, scholars have recently shown that firms can strategically use the taken-
for-grantedness of categories as cover to take actions that avoid scrutiny (Hsu
and Grodal, 2015). Do leaders use similar strategies when interacting with the
22 Administrative Science Quarterly (2018)
market? This question raises important concerns about the subtle means by
which powerful individuals exert control over our society (Gramsci, 1971). If the
existing institutional arrangement is not optimal but people take it for granted,
are leaders deliberately not discussing these assumptions so as to reinforce
the status quo? As Comaroff and Comaroff (1991: 24) observed, ‘‘Hegemony,
at its most effective, is mute.’’
But research on the recent financial crisis (Lounsbury and Hirsch, 2010) has
suggested that such hegemonic concerns might actually be more complicated,
proposing that the prominent leaders who oversee our financial system might
have become conditioned by their own assumptions (Rubtsova et al., 2010; Marti
and Gond, 2017). Fligstein, Brundage, and Schultz (2017: 904), after examining
the Fed’s FOMC transcripts, concluded that it ‘‘failed to anticipate the risks
involved in the 2007 to 2008 financial crisis principally because of their overreli-
ance on the frame provided by academic macroeconomics.’’Abolafia (2012: 112)
echoed this idea, suggesting that the Fed might get lost in the very game it had
created: ‘‘The danger is that proficient masters of spin become so confident in
their technical discourse that the restraints of uncertainty and legitimacy are no
longer sufficient to encourage prudent questioning of the current operating mod-
els.’’ But my findings cast doubt on the idea that the Fed was unaware of the
framework within which it operated. If its members were blinded by their own
assumptions, they would not discuss the backing at all. The fact that the Fed
seems to regularly discuss the backing, even during the financial crisis, may stem
from the fact that I examine the chair’s speeches instead of the FOMC meeting
transcripts. FOMC meetings are held primarily to discuss the operations of mone-
tary policy, and they tend to contain mostly conversations that occur within the
rules of the game. In contrast, speeches are occasions for the chair to reflect
more broadly about his or her beliefs about monetary policy framework itself.
Importantly, even though the Fed was more aware of its own framework than
prior work has assumed, Fed leaders have since acknowledged that the chal-
lenge was actually knowing which changes to this framework would help avert a
financial system collapse (PBS News Hour, 2008; Tarullo, 2017).
My findings point to an interesting suggestion: perhaps our institutional lead-
ers should discuss these taken-for-granted assumptions more regularly. The
sustained discussion of the underpinnings of our complex financial system may
keep both leaders and market participants more aware of the assumptions we
all are making. So long as the discussion of these assumptions does not itself
become normalized and taken for granted, such efforts should sporadically cre-
ate market uncertainty, which is important in a healthy financial system to deter
people from taking extreme risks. This line of reasoning suggests that both
researchers and practitioners might benefit from a better understanding of how
we might reduce certainty (rather than uncertainty) in our markets and institu-
tions (Zajac, 2013). Such efforts could provide some insight into how our
awareness of institutional assumptions affects our decision making (Beunza
and Stark, 2012; Anthony, 2017), perhaps helping us develop alternative pre-
ventive measures to avoid future system-wide crises.
Microfoundations of Institutions
Institutional theorists have conceptualized the micro-level plumbing of institu-
tions in a variety of ways (Powell and Rerup, 2017; Harmon, Haack, and Roulet,
Harmon 23
2018), using frameworks based on social psychological evaluations or schemas
(Bitektine, 2011; Tost, 2011; Glaser et al., 2016), emotions (Voronov and Vince,
2012; Creed et al., 2014), rituals (Dacin, Munir, and Tracey, 2010; Gray, Purdy,
and Ansari, 2015), practices or performances (Zilber, 2002; Smets, Morris, and
Greenwood, 2012; Glaser, 2017), and work (Lawrence and Suddaby, 2006;
Lawrence, Suddaby, and Leca, 2009). Latent in most of these frameworks is
the idea that language is somehow crucial to the way institutions are con-
structed, maintained, and changed over time, and a handful of scholars have
prioritized studying how language influences these processes. Phillips,
Lawrence, and Hardy (2004) suggested that discourses are one way to under-
stand how meaning coalesces in institutions, and Loewenstein, Ocasio, and
Jones (2012) suggested that vocabularies help us link micro-situational lan-
guage usage with macro-collective meanings.
I build on these perspectives to propose that arguments are a critical compo-
nent of this micro-level linguistic plumbing that maintains and changes our insti-
tutions. While discourses and vocabularies reflect the systems of words or
statements actors typically use in different institutionalized contexts, argu-
ments uniquely map onto the structural depth and taken-for-granted nature of
our social institutions (Friedland and Alford, 1991; Jepperson, 1991; Thornton,
Ocasio, and Lounsbury, 2012). This observation enabled me to identify the
backing as a conceptual and empirically observable aspect of our language that
has a direct relationship with people’s taken-for-granted assumptions and, by
extension, the stability of our institutions. Leaving the backing implicit strength-
ens this taken-for-grantedness, further stabilizing the foundations of the institu-
tion. Discussing the backing disrupts this taken-for-grantedness, triggering
mental alarms (Tost, 2011) or existential crises (Voronov and Vince, 2012),
thereby jeopardizing the stability of the institution (Harmon, Green, and
Goodnight, 2015). Thus the discussion of the backing represents a fulcrum
between what we might think of as centripetal and centrifugal forms of public
discourse, undergirding the stability and change of our institutions.
These observations also shed light on our understanding of cognitive legiti-
macy. While substantive forms of legitimacy (e.g., pragmatic and moral) are
more easily observable because they reflect the presence of people’s evalua-
tion (Deephouse et al., 2017), cognitive legitimacy concerns how much actors
take certain ideas for granted and thus reflects the increasing absence of eva-
luation (Suchman, 1995). Directly studying cognitive legitimacy and, more gen-
erally, the cognitive foundations of our institutions has therefore been
challenging when simply asking about such considerations draws unwanted
attention to them. Green, Li, and Nohria (2009) have proposed that one option
is to look for when justifications are no longer needed to convince others.
When we no longer need to justify a claim, the justification has become implied
in the overall line of reasoning, thereby representing a higher degree of cogni-
tive legitimacy. The theory I have developed here complements this perspec-
tive by proposing the backing ratio as a potential direct measure of cognitive
legitimacy in a collective discourse. In the absence of overt pressures that
silence people, a low backing ratio indicates that people do not feel the need to
discuss, or call on others to discuss, the assumptions that ground the institu-
tion, thus reflecting high levels of cognitive legitimacy. A high backing ratio
reflects low levels of cognitive legitimacy because it indicates that people feel
the need to discuss, or request others to discuss, these assumptions directly.
24 Administrative Science Quarterly (2018)
Arguments therefore uniquely reflect the underlying cognitive meaning struc-
ture of our institutions.
This perspective also provides a deeper understanding of some of the
micro-level strategies actors engage in to maintain our institutions. My findings
suggest that certain maintenance efforts, like rituals (Dacin, Munir, and Tracey,
2010) or storytelling (Zilber, 2009), successfully reproduce institutions in part
because they do not make explicit these taken-for-granted assumptions. Such
efforts powerfully reproduce the institution because they indirectly reaffirm its
taken-for-grantedness while leaving its fact-like and objective status intact. My
findings thus highlight the potential unintentional consequences of mainte-
nance work that is performed too explicitly, which resonates with an ethno-
methodological lens for exploring the micro-level interactions of institutions
(Garfinkel, 1967; Zucker, 1977; Heaphy, 2013).
Finally, while the primary thesis of this study concerns arguments and their
influence on institutional processes, we should not overlook the secondary thesis
concerning the role of emotions. A growing number of researchers are beginning
to demonstrate the important microfoundational role of emotions in shaping insti-
tutions (Voronov and Vince, 2012; Creed et al., 2014; Toubiana and Zietsma,
2017), and I have argued that emotions are not just an individual-level construct
but also a collective-level force that can influence the institutional contexts in
which people produce, maintain, and disrupt institutions. But how do these emo-
tions change and from where do they originate? Emotions may already reside
within institutions and people, but this study suggests that language can also
imbue a collectivity with emotion, keying them to new ways of thinking and inter-
preting (Goffman, 1967). Whether this keying originates from a prominent
speaker or the media, language can introduce a change in the emotional climate
that can alter how we make sense of important and uncertain market events.
By connecting arguments and emotions with the taken-for-grantedness of
our collective understandings, this study thus generates new insights into the
relationship between language and the microfoundations of institutions. It also
encourages us to be more cautious in assuming that we can take these collec-
tive understandings for granted.
Acknowledgments
I thank Martin Kilduff and three anonymous reviewers for their insightful feedback. I
owe a huge debt of gratitude to Peer Fiss, Sandy Green, and Tom Goodnight for their
encouragement during the development of this work and to Kyle Mayer, Scott
Wiltermuth, Jerry Hoberg, Vern Glaser, Kari Olsen, Nan Jia, and Sarah Bonner for their
continual support. I also thank Clare Chang, Sandhya Nadadur, Heather Rietzfeld, and
Richard Peterson for their helpful research assistance.
Supplemental Material
Supplemental material for this article can be found in the Online Appendix at
http://journals.sagepub.com/doi/suppl/10.1177/0001839218777475.
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Author’s Biography
Derek J. Harmon is an assistant professor of strategy at the Ross School of Business,
University of Michigan, 701 Tappan Avenue, Ann Arbor, MI 48109-1316 (e-mail:
djharmon@umich.edu). His research leverages language as a theoretical and empirical
lens to explore social evaluations, collective meaning making in markets, and the micro-
foundations of institutions. He received his Ph.D. in management from the Marshall
School of Business, University of Southern California.
34 Administrative Science Quarterly (2018)
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... We also examined the impact threshold for a confounding variable (ITCV) (c.f. Harmon, 2019;Hill et al., 2020) and found that our results are unlikely to be driven by the effects of a correlated omitted variable. Details of these tests are provided in the robustness checks. ...
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In the first edition of this handbook, Powell and Colyvas (2008) argued that much could be gained by making the microfoundations of institutional theory more explicit. That chapter concluded that the standard macro accounts associated with institutional theory needed an accompanying argument at the micro level. Our new essay represents such a journey, with stops along the way at several ports of call. We wend our way through such themes as enactment, interpretation, sense-making, and transposition. The central message of this voyage is that institutions are sustained, altered, and extinguished as they are enacted by collections of individuals in everyday situations. We expand on the earlier chapter by building on Pierre Bourdieu’s (1984) argument that to understand important aspects of French society, investigators need to look into daily affairs and the people who conduct them. In this respect, we embrace Jim March’s (2008) observation that “history is not produced by the dramatic actions and postures of leaders, but by complex combinations of large numbers of small actions by unimportant people.”
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This reissue of the modern classic on the study of argumentation features a new Introduction by the author.