Does Section 16(B) Deter Insider Trading by Target Managers?
Posted: 23 May 1996
Abstract
Author's description of his article: This paper empirically examines whether the short swing trading rule (Section 16(b) of the Securities Exchange Act) deters managers from trading before merger announcements. This rule bars insiders from profiting on round-trip trades completed within a six month period. Insiders can generally escape the short-swing rule by selling six months and a day after purchase. However, a merger forces the sale of all the outstanding common stock of the target firm, preventing insider purchases within six months before the merger from escaping this rule. We analyze the trading behavior of top managers of takeover targets around the announcement of a bid. In order to disentangle the effect of this rule from the deterrent effect of the more punitive Rule 10(b)(5), we examine the time period from 1941 to 1961, an era when the latter rule was not enforced. We find that managers of target firms reduce their purchases before the merger announcement below their normal level of purchases and relative to a control sample of non-target firms. This evidence is consistent with a deterrent effect of Section 16(b). We find that managers reduce their purchases before the merger completion only in the 1941-55 period. Surprisingly, managers do not reduce their sales before the announcement, even though Section 16(b) cannot punish deferral of planned sales.
JEL Classification: G12, G14, G18, K22
Suggested Citation: Suggested Citation