(1454). Still, Manne has a valid argument that in light of the difficulties outlined by Schotland, the matter could still be resolved by the firm setting its own policy. Critics have pointed out that the returns a manager can earn through insider trading are limited by the manager’s wealth (Bainbridge, Trading” 9). On the other hand, other critics comment that if outside “Insider financing is possible, the manager’s wealth no longer restricts returns (Dent 247). Although meant to show that the harm of insider trading can be magnified, it also contradicts the limits stemming from wealth. Empirical studies can shed light on the matter, but unfortunately are not definitive one way or the other. Empirical evidence from Givoly and Palmon in 1985 found that insiders did indeed earn abnormal returns, but that these returns lasted well beyond the period following the disclosure of inside information. This, incidentally, works against the compensation argument in terms of encouraging entrepreneurial behavior, but also works against the argument regulating insider trading at all, as the returns were not due to specific inside information, but more general superior assessment of the firm (85-86). On the contrary, Roulstone found that companies that allowed insider trading paid less in executive compensation than those that restricted insider trading (525-549). This finding would suggest that insider trading is indeed an effective form of compensation. Ultimately, many economists and legal theorists have proposed models and carried out empirical studies, but no general consensus has been reached. However, as there seem to be firms that could benefit from allowing insider trading, this issue could be left to individual companies to decide for themselves, as long as insider trading is properly disclosed as compensation, and associated fraud is still prosecuted. Conclusion Although many changes in the insider trading law and the theories backing them have developed since he first wrote, Manne’s arguments still hold up quite well. This paper did not address the argument of improved market efficiency, but it examined the lack of a harmed party
(1454). Still, Manne has a valid argument that in light of the difficulties outlined by Schotland, the matter could still be resolved by the firm setting its own policy. Critics have pointed out that the returns a manager can earn through insider trading are limited by the manager’s wealth (Bainbridge, “Insider Trading” 9). On the other hand, other critics comment that if outside financing is possible, the manager’s wealth no longer restricts returns (Dent 247). Although meant to show that the harm of insider trading can be magnified, it also contradicts the limits stemming from wealth. Empirical studies can shed light on the matter, but unfortunately are not definitive one way or the other. Empirical evidence from Givoly and Palmon in 1985 found that insiders did indeed earn abnormal returns, but that these returns lasted well beyond the period following the disclosure of inside information. This, incidentally, works against the compensation argument in terms of encouraging entrepreneurial behavior, but also works against the argument regulating insider trading at all, as the returns were not due to specific inside information, but more general superior assessment of the firm (85-86). On the contrary, Roulstone found that companies that allowed insider trading paid less in executive compensation than those that restricted insider trading (525-549). This finding would suggest that insider trading is indeed an effective form of compensation. Ultimately, many economists and legal theorists have proposed models and carried out empirical studies, but no general consensus has been reached. However, as there seem to be firms that could benefit from allowing insider trading, this issue could be left to individual companies to decide for themselves, as long as insider trading is properly disclosed as compensation, and associated fraud is still prosecuted. Conclusion Although many changes in the insider trading law and the theories backing them have developed since he first wrote, Manne’s arguments still hold up quite well. This paper did not address the argument of improved market efficiency, but it examined the lack of a harmed party
ASSC%202014%20Kyle%20Kreider%20-%20Insider%20Trading%20Revisiting%20Manne's%20Claims.docx