DeLong Doubles Down

Brad DeLong responds to my post.  As illustrated below the jump, he engages in selective editing and continues to misrepresent the players in this saga.  (He also omits links to most of those to whom he’s responding.)  Larry Ribstein also comments here.

Brad DeLong’s response post reads as follows (in full):

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)…

Here are the relevant portions of the post again, with the relevant omissions (and links) restored.

Ribstein, Adler, Volokh [I'm not sure what Eugene did. JHA], etc.:

If DeLong had bothered to look even at the abstract of Todd’s article, perhaps he would have noticed 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.”

Todd doesn’t even argue based on this evidence that insider trading liability should be abolished.  Rather, he says only that “the case for classic insider trading is made much weaker by this data.”  He also notes in the abstract that “there still may be good reasons to prohibit some individuals from trading on material, non-public information.” One of these reasons might be DeLong’s point that firms would be better off if insiders weren’t paid with insider trading profits.  Maybe that holds even if the insiders are willing to pay for the opportunity to trade.  I don’t necessarily subscribe to DeLong’s arguments, but I’m not willing to call somebody “stupid” and unfit for teaching for making them.  My only point here is that Todd doesn’t discuss this issue at all.

J.W. Verret:

In “Insider Trading and CEO Pay,” Prof. Henderson examines the effectiveness of insider trading as a compensation device using a study of 10b5-1 trading plans. His findings are in line with Henry Manne’s original thesis from nearly 40 years ago that insider trading didn’t diminish firm market value on net and 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. The legal issues about paying using illegal profits are explored. As a matter of policy, the data seriously undercut criticisms of the laissez-faire view of insider trading. most closely associated with Henry Manne. 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, and the firm should internalize any costs arising from this payment scheme, since future shareholders should take this into account when deciding whether and what price to buy shares. While there still may be good reasons to prohibit some individuals from trading on material, non-public information, the case for classic insider trading is made much weaker by this data.

. . . .

Delong also fails to mention this comment by Verret:

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)

The title of DeLong’s post, just for the record, is: “Department of “Huh?!” (There Are Some Branches of Legal Academia I Will Never Understand).”

UPDATE: Final comments on this from Professor Bainbridge and J.W. Verret.