Do Pills Poison Operating Performance?

Abstract

Contrary to arguments that poison pills degrade firm performance, we find that operating performance generally improves during the five-year period after pill adoption. Performance improvements are present in a wide range of firms, and are independent of board structure, year of adoption, and whether the firm is R&D intensive. Furthermore, the stock price reaction to announcements of pill adoptions is positively related to subsequent improvements in earnings before interest and taxes, suggesting that investors anticipate the improvements. Combined with the evidence from Comment and Schwert (1995), that the presence of a poison pill does not reduce takeover probabilities or premiums, the evidence in this paper undermines the widely held view that poison pills have systematically negative effects on firm value and performance.

Keywords: poison pills, operating performance