Demsetz, Harold

English

Case Western Reserve University School of Law

Case Western Reserve Law ReviewVolume 50 | Issue 21999Henry Manne: Scholar, Academic Entrepreneur,and FriendHarold DemsetzFollow this and additional works at: https://scholarlycommons.law.case.edu/caselrevPart of the Law CommonsThis Symposium is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law ScholarlyCommons. It has been accepted for inclusion in Case Western Reserve Law Review by an authorized administrator of Case Western Reserve UniversitySchool of Law Scholarly Commons.Recommended CitationHarold Demsetz, Henry Manne: Scholar, Academic Entrepreneur, and Friend, 50 Case W. Res. L. Rev. 253 (1999)Available at: https://scholarlycommons.law.case.edu/caselrev/vol50/iss2/7HENRY MANNE: SCHOLAR,ACADEMIC ENTREPRENEUR,AND FRIENDHarold DemsetztThe task formally set for me is to comment on Professor Car-ney' s discussion of Manne's work on corporate control, and I turn tothis task first. I have also been told that, if I desire, I may write aboutother matters, and the temptation to do so is irresistible. Thus, aftercompleting my formal assignment, I discuss the Henry Manne Iknow.Professor Carney's discussion of Manne's articles on corporatecontrol is competent, insightful, and correct in its description ofManne's work on this topic. 1 Few scholars can lay claim to a discov-ery of the workings of unsuspected economic forces. Even fewerhave the words by which they identify their discovery become an in-delible part of the language of a field of investigation. Manne's Mar-ketfor Corporate Control is such a discovery.I do have one complaint about Professor Carney's discussion ofthis work. In the draft article, he claims a bit too much for Manne insaying that in these articles Manne "had essentially outlined most ofthe concepts that we now think of as constituting the theory of the,,2firm .... I think Manne can go home happy even if I cannot acceptthe full scope of this claim. Were I to accede to this claim, I would becompelled to accept what it implies, that a large part of my work issimply redundant. It is easy to see why Carney's focus, which is onthe issue of the separation between ownership and control, might leadto such a claim. The truth is, there is much more to the theory of thefirm. Armen Alchian assures me that I write about this as at least halfan authority. Ken Lehn gives me the same assurance. And twohalves make a complete authority. There are problems in the theoryof the firm that have little to do with issue of separation betweenownership and control, and there are other lines of attack on this is-t Professor Emeritus, Department of Economics, UCLA.1 William J. Carney, The Legacy of "The Market for Corporate Control" and the Originsof the Theory of the Finn, 50 CASEW. Rs. L. REv. 215 (1999).2 Id. at 225.253CASE WESTERN RESERVE LAW REVIEWsue. Among such problems are vertical integration, franchising,pricing practices, contractual arrangements with suppliers, productmix, compensation methods, capital structure, and ownership struc-ture to name only a few.Manne's work on the market for corporate control is as much, orin my opinion more, a contribution to our understanding of marketcompetition than to our understanding of the firm. It describes animportant variant of competition that had gone unrecognized-themarket for control-and it enlightens us about the consequences ofcompetition in this market. This competition constrains the behaviorof corporate management and helps us understand how the quality ofbusiness management is maintained. But competition, even of thissort, is first and foremost a phenomenon of the market competition,not a phenomenon of the firm.The premise underlying Manne's argument is that the transfer ofassets in an acquisition or takeover yields an improvement in themanagement of the acquired assets. But why are we so confident thatthis is so? Some theories of mergers and takeovers suggest that im-provement is not to be expected. Jensen's free cash flow theory, forexample, gives reasons for thinking that some acquisitions are under-taken by an entrenched management whose objective is to keep con-trol of the corporation's wealth instead of paying it out to sharehold-ers as dividends. In this view, the acquirer's firm is subject to a"separation between ownership and control," and this suggests thatthere will not be a significant increase in the productivity of acquiredassets.Studies of mergers, moreover, do not offer convincing evidencethat such benefits are the dominant result of acquisitions. True, theyshow that target company shareholders secure a premium for theirshares in the event of a hostile takeover, but the reason for this pre-mium is unclear. It may be that it is paid in anticipation of a forth-coming improvement in the management of the acquired assets, anexplanation that is consistent with Manne's view. However, the pre-mium may also result from the willingness of the entrenched man-agement of the acquiring company, in its haste to put the firm'swealth beyond the reach of its shareholders, to over-pay for the tar-get's shares. Statistics show that investors think poorly of an acquisi-tion in some instances, resulting in the reduction in the price of theacquiring company's shares when the acquisition is announced andcompleted. In other instances, they think well of an acquisition. The' See Michael C. Jensen, Agency Costs of Free Cash Flow, Corporate Finance, andTakeovers, 76 AM. ECON. REV. 323-29 (1986).[Vol. 50:2531999] SCHOLAR, ACADEMIC ENTREPRENEUR, AND FRIEND 255two reactions largely cancel each other out statistically, so that ac-quiring company share prices, on average, for large samples of acqui-sitions, do not change much in the event of an acquisition.This may reflect competitiveness in the market for control, theresult of which is to keep the rate of return earned from acquisitions atlevels no larger than can be earned elsewhere. Still, the near-zeroaverage gain may obscure a systematic difference between acquirers.Positive, or larger, returns to acquiring company shareholders mayreflect the presence of acquiring company management that heedshareholder interests. Negative, or smaller, returns to acquiring com-pany shareholders may reflect the presence of entrenched manage-ment serving their own interests. Introducing a variable correlatedwith the degree to which we expect management to serve their share-holders would reveal this systematic difference. Ownership concen-tration is such a variable. An ownership structure that is highly con-centrated facilitates easy monitoring and discipline of management bya corporation's owners. On this plausible presumption, ownershipconcentration should correlate positively with acquisition profitabil-ity.There is some evidence that tightly held firms do earn a positivereturn for their shareholders when competing in the market for con-trol, but even this evidence does not compellingly deal with theproblem I have described. The issue here is not really the degree towhich acquiring company shareholders are made better off, which iswhat such a correlation would attest to. An improvement in the man-agement of the acquired assets is not the only way acquiring companyshareholders can be made better off. They can be made better off be-cause the management of their firm succeeds in securing assets for aprice that makes them a good buy even if there is no subsequent im-provement in the productivity of the acquired assets. A well-run ac-quirer, which I shall presume is one for which ownership is concen-trated, probably gets assets at lower prices than does a poorly-run ac-quirer, but the appropriate test is to determine if more concentrationin the ownership structure of the acquiring firm is correlated posi-tively with improvements in the productivity of the assets it acquiresthrough mergers and takeovers. This is not easy to ascertain, but thesuccessful pursuit of this objective would provide us with better mate-rial on which to base our understanding of the market for control.Now, to the Henry Manne I know. I am not sure precisely whereand when Henry and I first met, but I think it was in the first half ofthe decade of the 1960s. It is hard to believe that almost forty yearshave passed since we met. Manne is a distinguished member of a rarebreed, one part successful academic entrepreneur and a second partCASE WESTERN RESERVE LAWREVIEWscholarly talent. His entrepreneurial successes include, importantly,innovating a new type of law school curriculum and creating the Law& Economics Center. It is the Center with which I am most familiar.Armen Alchian and I were the first regular lecturers of the Cen-ter, beginning our work at the University of Rochester sometimeduring the decade of the 1960s. I continued this work for about tenyears. Armen stayed much longer, but he put a higher value than Idid on free golf at good courses. Teaching in the Center was a superbexperience-new friends, new problems, and new ways to think aboutthese problems. And the teaching generated new income, too. Myfamily is grateful for this. Henry Manne showed considerable skill insetting my compensation. It was too low for me to escape from a debtI had incurred speculating on Treasury bond prices and just highenough to cover many months of margin calls. Working for Henrybecame hardly-voluntary servitude.The Center's pay did not come easily. The dormitory room inwhich Manne imprisoned me at Rochester was in proportion to thecompensation package he had designed: just big enough to containme but too small to allow straying from the desk. Lectures weregiven in the morning and the afternoon. Lunch and dinner were to beused to extend these lectures in a conversation mode. The extensionwas not easy. Law professors and judges have plenty to say on theirown, some of it correct. Agitation from what I was hearing, com-bined with frustration in not being able to get a word in, brought re-peated attacks of indigestion. Now, in preparation for a meal withjudges and/or law professors, I put a roll of Tums in my pocket.Manne shepherded the Center for almost four decades. Heguided it with great skill through three relocations, staying just be-yond the reach of the posses sent by the establishment to arrest hisefforts. The importance of the Center is not easily exaggerated. Itbecame the premier institution by which the logic of economics metthe problems of law. Teaching in it has been an honor.The Center yielded results much grander than I had thought pos-sible. Judicial outcomes and the study of the law have been changed,probably forever. Preponderantly, improvement has resulted. Occa-sionally, a former student renders a decision that suggests the need fora refresher course, but perfection is not of this world. The Center'ssuccess is easy enough to see now, but only Manne had the foresight,the willingness to commit the time and energy, and the courage tobear the attendant professional risks.I retired from the Center before Manne became Dean at GeorgeMason, but I did visit the Law School on a few occasions. I was256 (Vol. 50:2531999] SCHOLAR, ACADEMIC ENTREPRENEUR, AND FRIEND 257struck by the initial building that housed the School-a former de-partment store. He had come full circle, back to a glorified ex-drygoods store after leaving his father's Memphis dry goods store.Henry's store, of course, was bigger than his father's, and it had anescalator. But his father sold his business, a feat that Manne failed toreplicate despite many attempts. The State always managed to inter-cede just before the cash changed hands. True enough, he and hisfather sold different goods. Henry sold ideas, not dry goods, andsome of these ideas were just the opposite of dry. His father offeredcustomers a money back guarantee. The best Henry could do was tomount a suggestion box in the main lobby of his department store.Henry Manne had become Dean of a school that had no tradition inlegal education and that was housed in a building having no academicor other architectural feature worthy of the name. Yet, he made theworld of legal education stand up and take note of the very useful andimaginative curriculum he set in place.Beyond these considerable accomplishments, Henry Manne pos-sesses a joy of life and a spirit of adventure that has enriched thosewho have traveled with him. He pressured me to eat raw poisonousblow fish in Japan. When I asked him how do we know if the poisonbladder has been successfully removed, he answered that, if not, wehad a good case. We motored to Monte Carlo, and he got me to losea few bucks in the cheap outer-lobby gambling hall. While investi-gating the Everglades, he kept me looking up at a strange bird whosefeeding habits he was explaining to me, and I almost stepped on alarge alligator. Despite all this, and more, we still live. Our pocketsbrim with retirement money. The world can use a few more changes.So, Henry, my good friend, what's next?

Henry Manne: Scholar, Academic Entrepreneur, and Friend

https://scholarlycommons.law.case.edu/cgi/viewcontent.cgi?article=1363&amp;context=caselrev

Henry Manne: Scholar, Academic Entrepreneur, and Friend

Abstract

Similar works

Full text

Available Versions

Case Western Reserve University School of Law