Corporate & Securities Law

DeLong and Insider Trading

Larry Ribstein notes that DeLong’s scurrilous attack is misplaced since Henderson’s piece makes a much more modest point than the general observation from Henry Manne with which DeLong seems to actually disagree.  I don’t think I made that clear enough in my last post and so I am glad my colleague pointed that out.  We might consider DeLong’s argument as actually against Henry Manne’s work on insider trading (and an attack on my description of Henderson’s paper).  As such, I wrote directly to the source to get his thoughts.

Henry Manne emailed with a response to DeLong’s assertions quoted below.

We do not have the slightest idea of how managers would respond to a regime of IT, [insider trading] but we do know that the practice which was legal and very widespread  pre-1961 (really about 1980 when enforcement got serious) did not cause any hue and cry from shareholders.  But there is an analytical argument as well.  If the kind of IT deLong decries actually occurred and had the consequences he predicts, that would be tantamount to the managers intentionally creating bad news so that they could capitalize on it.  That might conceivably be an end period problem, but it is extremely unlikely otherwise.  All the other vectors that work on managers? motives push in the opposite direction including reputation, bonuses, salaries, promotions, etc. etc.  The intentional promotion of greater variability in stock price would be dealt with exactly as any other defect in management style is dealt with.  I don?t have to recount for you all the techniques of disciplining managers.  Suffice it to say that they work pretty well, most especially when there is a controlling block of shares held by someone who looks over management?s shoulder.

Full post as published by Truth on the Market on October 04, 2010 (boomark / email).