The Contributions of Henry Manne

0:00So this is actually the second time I'm presenting on Dean Manning's work. I did that two years ago at George Mason University on the owner of his book, Insider Trading and the Stock Market that was published in 1966. So I guess either I am the only person that can appreciate the true value of his textbook or everybody likes French people. I don't know which one is it, but I hope it's only because everybody likes me. So I'm going to try to summarize and reflect on Dr. Manny, Professor Manny's contribution to the literature on insider trading and his impact on the low and economic and finance community.

0:47So let's think first about First about how insider trading was perceived in the literature before Dean Manning wrote his book and I think it also was his dissertation as well or he wrote his dissertation at Yale on that topic as well. So before 1966 insider trading which is defined broadly as the use of non-public information A securities transaction was actually subject to a more moralistic, emotional approach. It was everything, look, somebody is using private information that not everybody has to make a profit and that's unfair and it's not moral and it's not right.

1:42Dr. Dean Manning talked about these lectures when a student was stomping on the floor and I don't care. It's not fair. And I actually had the same experience. I was teaching a class and I was lecturing on insider trading and all the students were looking at me and they were saying, we don't care. It's not fair. I'm like, okay, what is fair? And they say, I don't know. Fair is what I pay when I take the bus. That's all I do. I know about fairness. So one of the things which is great about, one of the pioneering work thing in Henry Manny's work is that he tried to bring some rigorous logical, analytical, scientific analysis into studying insidious trading.

2:32In other words, his approach was the debate has become completely emotional. It's all about how I feel. It's not about how it is. There is no real economic analysis, so he used economic analysis to try to rigorously study what is insider trading. And you can have one big argument why Dean Manning supports insider trading. First is that insiders should be considered as entrepreneurs. And the entrepreneurs on the stock market, when they trade on inside information, which means non-public information, their transactions tend to move the price toward the true value. It improves the informational efficiency of the stock market.

3:20In other words, their transactions guide less informed investors toward relocating capital to more valuable lines of production. of Production. And therefore, when they trade on inside information, the price of the stocks becomes more accurate. Obviously, there has been a lot of literature on the topic, and a lot of people have done research on the effect of insider trading on the stock prices say, well, that's not totally true, because insiders will tend to try to hide the transaction. But what those scholars forget is that insider trading is illegal.

4:06So if it's illegal, of course I'm not going to try to trade on the stock market and tell to everybody, look, I'm selling stocks with insider information, I'm buying stocks with insider information. I'm going to try to hide my transaction and therefore insider trading won't have as much effect on the stock prices. On the other hand, if you accept Dean Manning's argument that if you were in a market where Insider Trading was unregulated. You will assume insiders will be more willing to trade in open markets and therefore the transaction will be more informed. And one of the aspects that Dean Mann emphasizes is that when you allow insider trading, you allow insiders to come to the information about the firm without disclosing information that might be crucial for the competitors. When you talk about trade secrets, you can trade on those The second point, and Peter Klein talked about it a little bit, is that in search, and he was already in the 1966 book, as well as his most recent paper by Dean Manny Stanley, which

5:26which is entrepreneurship, compensation and the corporation is the idea that insider trading could be used as a compensation scheme to reward the entrepreneurial activities of insiders. When you read the work of Dean Mannion, this topic is thinking has slightly evolved by incorporating more and more some of the Austrian ideas. In 1966, he clearly emphasized the idea of entrepreneurship, and it's only my own interpretation actually, from a Schumpeterian viewpoint, but after, in the later years, there's more Austrian, Kirznerian, Hayekian, Misesian understanding of entrepreneurship, but one of the key things I read in the paper is that maybe we should not define start trading as a compensation on Scheme and more as a system. The idea, it is different to consider Insider Trading as a Compensation Scheme because contrary to all the compensation mechanisms like bonuses, pay rates and stock options, you do not have a necessary immediate warranty that by trading on Insider Information you will gain the full value of your innovations. And the additional

6:52Another aspect that is in this paper is that by prohibiting insider trading, you prevent smaller size corporations to be able to compete with larger size corporations for their entrepreneurial skills of managers of other type of entrepreneurs within the firm. Because sometimes smaller firms cannot compensate those entrepreneurs the same level than big In his paper, he discusses this idea why we have those huge salaries and compensation in large corporations and so different from smaller size and one explanation possibly is the fact that insider trading is illegal and maybe those big corporations or smaller size corporations will use insider trading as a system to reward entrepreneurs for their entrepreneurial activities, whether it was entrepreneurial activities These are discovering new ideas or information, or opportunities, or create products, etc, etc.

7:59Now I would like to talk briefly about the influence of Dean Manning on the law, economics, and finance community. Well, first, one Kansas book was not very well-welcome. If you look at a lot of book reviews and I read a lot, they were quick to dismiss this idea of entrepreneurship as a possibility to reward entrepreneurship. They were also quick to argue that, contrary to what Manier says, that small investors tend to lose out of insider trading when they buy stock from insiders.

8:45And if the stock goes down, they are losing because they bought the stock. And the response is, well, whether the insider was there or not, they would have still bought the stock. It doesn't matter. So I made a slight search on what the insider trading literature is now. And there's about 200 to 300 references just in the US on insider trading. There are about 200 to 300 papers that have been published. When I made a search in 2000, there were about 300. There are about 40 to 50 U.S.D. citations that have known the topic of insider trading. Before Dean Manning wrote, there was not much literature on insider trading. And even less among economists and finance.

9:37Much less. There was pretty much nobody. I think one of the great contributions is that whether or not you agree with what Dean Manning says, everybody who was opposed or in favor of insider trading was forced to think more rigorously about the topic. If you look at the literature on insider trading, you have more economics than there ever was. and you have more empirical research on insider trading and with the advance of econometrics there have been an improvement in trying to assess the desirability of insider trading. There were studies on whether insider trading improved market efficiency, informational efficiency, what is the impact of insider trading on the bid as spread, on the market liquidity, on the cost of on cost capital, on price accuracy, on ownership concentration, on transaction costs, market volatility, bankruptcy rate, there has been even public choice analysis of insider trading.

10:43Unfortunately, when you look at the literature, and Dean Manning says that in his last paper, I thought I was done with the topic. And it's like suddenly, well, maybe I was not done, because apparently nobody is still investigating some of those crucial questions I think we need to answer. And when I look at the analysis, there's a lack of consensus, and one explanation is that empirical research has been growing a lot, a lot, but the problem is that when you do a lot of data mining, you can end up with finding statistical significance with everything. Let me say these three important questions A lot of literature is emphasizing that insider trading is inefficient, therefore we should regulate insider trading.

11:50This literature tends to ignore, first of all, the huge amount of literature that says that insider trading laws are not effective. But they never question this most important question. Is this regulation efficient? Are the benefits worth the cost? If you spend billions and billions of dollars on regularity insider trading and you catch nobody, virtually nobody, and there is no real data that shows that when you prohibit insider trading, stock markets are more efficient and more liquid because the empirical research cannot take into account all the possible factors, it doesn't matter. And ultimately, the arguments are, well, improve the investor's confidence in the stock market.

12:35Investors are not more confident in the stock market because of these insider trading laws. If you look at surveys, people think insider trading is prevalent on the stock market. The last survey since Martha Stewart, people were saying, yes, obviously there's a lot of people that trade on insider information. What can we do about it? Nothing. Hayek used to talk about competition as a discovery procedure. When you allow competition, you can allow firms or securities markets to discover what are the most efficient institutional rules. It is possible that if you want to attract a lot of capital, you ban insider trading.

13:24But maybe some stock markets will decide to allow insider trading and people will still invest in those stock markets. The idea that you will discover by allowing competing systems what are the most efficient rules and mechanisms that will promote the allocation for the most used value. Finally, there is the work of Henry Manning on insight trading as a compensation mechanism. Henry Manning has done a lot of work but nobody else has really investigated it seriously. Can insight trading be an effective system as a compensation for entrepreneurship? Particularly, you can imagine again the idea that you will allow firms to decide or not they want to allow insight trading in their firms and you could decide whether or not investor will invest in it. You will have this idea of competition as a discovery procedure and this idea of local knowledge. Different firms will use different systems based on the local knowledge of those people.

14:24Alright, thank you.