Takeover Defenses in the Shadow of the Pill: A Critique of the Scientific Evidence
John C. Coates, IV
Harvard Law School
Texas Law Review, Vol. 79, No. 2, December 2000
Two decades of research on poison pills and other takeover defenses does not support the belief - common among legal academics - that defenses reduce firm value. Even by their own terms, defense studies produced weak and inconsistent results, and failed to discriminate among information effects of defense adoptions. But prior studies suffer from serious, previously unrecognized design flaws: (1) pill studies assume pill adoption has an effect on takeover vulnerability and fail to recognize that nearly every firm already has a "shadow pill," making pill adoption relatively unimportant; and (2) all studies fail to account for ways defenses interact, such as the way that the shadow pill has made fair price and supermajority vote provisions unimportant. Not only do these flaws help explain the weak results of such studies, but the flaws are consistent with new evidence on bid outcomes, and recognizing them should improve future research on defenses.
Keywords: poison pill, takeover defense, hostile takeover, staggered board
JEL Classification: G31, G32, G34, K22
Date posted: April 19, 2001
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