DOES SECTION 16B DETER INSIDER TRADING BY TARGET MANAGERS

This paper examines empirically whether the short-swing rule (Section 16b of the Securities Exchange Act) deters managers from trading before mergers. Since a merger forces the sale of the target's outstanding equity, insider purchases within six months before the merger cannot escape this rule. We examine the 1941-61 period when no other insider trading laws were enforced. Consistent with 16b's deterrent effect, managers' purchases drop significantly before the announcement. Before completion, the decrease occurs only in the 1941-55 period. Surprisingly, pre-announcement sales do not decline, even though 16b cannot punish deferral of planned sales.