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insider trading & the motivation of managers not to succumb to agency costs

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Meistro posted on Sun, Mar 3 2013 12:32 PM

In Chapter 4 of Economic Calculation in the Socialist Commonwealth, Mises talks about the role that managers play in large scale enterprise.  One of their motivations for not succumbing to agency costs is that their financial interests are often in line with those of the corporation because they can bet on the stock market on their company.

This is a fatal error. The managers of large-scale companies are bound up with the interests of the businesses they administer in an entirely different way from what could be the case in public concerns. They are either already owners of a not inconsiderable fraction of the share capital, or hope to become so in due course. Further, they are in a position to obtain profits by stock exchange speculation in the company's shares.


Now I'm not 100% what insider trading laws forbid, but do you think these laws have an impact in this area?


... just as the State has no money of its own, so it has no power of its own - Albert Jay Nock

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I think this Mises Daily is highly relevant to your question:

Schools are labour camps.

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Sure these laws affect management behavior and divert wealth from one group to another just like all the other regulations do.  In this case the regulations against insider trading tend to make managers wealthier at the expense of investors.  Investors have very limited information about the workings of the firm and therefore need information taken by short sellers and option traders to get an accurate picture of the firm.  Look at how much shareholder wealth went out the window with Bush 2's restrictions on short selling?  And the saddest part is that it is all 100% unnecessary.  If a board of directors wanted to prevent their executives from behaving in a certain way then those directors are very capable of structuring a contract to prohibits these behaviors.  Then it is up to investors to determine which investments to make based upon the willingness of directors to show the investing public the share purchasing behavior of managers.

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thanks for the link to the murphy article, great read.  i also liked a piece he did recently w/ a little empirical analysis of the minimum wage... I don't have the link off hand I think I read it off facebook.  what exactly is the libertarian punishment for breach of contract anyway?  i guess it might be written into the contract and I guess should be focused on restitution to the victim as in all libertarian law


... just as the State has no money of its own, so it has no power of its own - Albert Jay Nock

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