links for 2010-10-05
Berkeley Econ 1: Fall 2010: Essay Assignment for October 13

Department of "Huh?!" (There Are Some Branches of Legal Academia I Will Never Understand)

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Ribstein, Adler, Volokh, etc.:

[T]he abstract of Todd [Henderson]’s article... [shows] that the article’s not about alignment of incentives, but about whether boards bargain with insiders over their gains. Todd finds evidence consistent with the hypothesis that “boards pay executives in a way that reflects the profits they are expected to earn from informed trades”...

J.W. Verret:

In "Insider Trading and CEO Pay," Prof. Henderson examines the effectiveness of insider trading as a compensation device.... His findings are... that insider trading... may serve a useful purpose as an executive compensation device to motivate managers to maximize the value of the firm...

Todd Henderson, in said abstract:

Insider Trading and CEO Pay: This Paper presents evidence boards of directors “bargain” with executives about the profits they expect to make from trades in firm stock. The evidence suggests executives whose trading freedom is increased using Rule 10b5-1 trading plans experienced reductions in other forms of pay to offset the potential gains from trading. There are two benefits from trading—portfolio optimization and informed trading profits—and this Paper allows us to isolate them. The data show boards pay executives in a way that reflects the profits they are expected to earn from informed trades.... As a matter of policy, the data seriously undercut criticisms of the laissez-faire view of insider trading.... At least with respect to classic insider trading (that is, a manager of a firm trading on the basis of information about the firm where she works), if boards are taking potential trading profits into consideration when setting pay, it is difficult to locate potential victims of this trading. Current shareholders should be happy with a deal that pays managers in part out of the hide of future shareholders...

I call this one for Verret 6-0, 6-0, 6-0.

As Measure for Measure writes in comments:

I disagree with Ribstein’s characterization of [Henderson's paper] as quoted by Adler.... [Henderson's claim that] "it is difficult to locate potential victims of this trading" is a normative claim.... Henderson’s paper indeed was about alignment of incentives. And it seems (on the basis of the abstract) that Henderson looks at first moments (profit taking by inside traders is offset by boards who deduct pay accordingly) but not second moments (the insider trading contract serves to enhance stock volatility)...