Corporate surprises, insider trading and prediction markets

Recently we've seen a few remarkable corporate surprises, like Merrill's $8.4 subprime hit and the delay in Boeing's Dreamliner. On the latter, see today's WSJ:

Boeing Chairman and Chief Executive Jim McNerney said the company has sent manufacturing and procurement experts numbering "in the hundreds" to suppliers' factories after discovering problems with the first 787 delivered to Boeing's final assembly line. Those problems, including a serious lack of documentation on the work remaining to complete the first airplanes, drove the company's decision this month to delay the first 787 deliveries for six months and to replace the head of the plane's development efforts. Noting that Boeing was "surprised on the physical reality" of the condition of the first plane, Mr. McNerney said officials "realized we really need to work with [suppliers] to make sure we have better visibility" on the manufacturing process. "We need that data transparency across all of the build in order to execute the plan that we've laid out."

Could prediction markets reduce surprises and provide better corporate governance? Henry Manne thinks so. See Insider Trading: Hayek, Virtual Markets, and the Dog that Did Not Bark. An internal prediction market, say inside Boeing, might cull information from all nooks and crannies of the organization that might not otherwise be forthcoming.

Of course these markets would have to be designed to, among other things, ensure that they don't give insiders perverse incentives to manipulate corporate events. But while the design issues are daunting, the stakes in terms of the value of better information are very high.

Alternatively, we might consider less regulation of insider trading in securities markets.  For a discussion of such trading in the market for credit derivatives – which is obviously relevant to the Merrill situation -- see this earlier post.