Financial institutions, information, and investing-at-a-distance

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