Investors’ Reaction to the Use of Poison Pills as a Tax Loss Preservation Tool

Posted: 28 Mar 2014

See all articles by Stephanie A. Sikes

Stephanie A. Sikes

University of Pennsylvania - Accounting Department

Ryan J. Wilson

University of Oregon

Xiaoli (Shaolee) Tian

Georgetown University - Department of Accounting and Business Law

Date Written: February 27, 2014

Abstract

The recent economic downturn resulted in firms generating significant tax losses, which they risked losing if they experienced an ownership change. In response, a number of loss firms adopted poison pill plans. We document a significant negative market reaction to the announcement of 62 poison pill adoptions related to net operating losses (NOLs), suggesting that in general investors do not consider management’s claim that the pills are adopted to preserve a valuable tax asset to be credible. However, we find cross-sectional variation consistent with investors considering whether a pill is legitimately adopted to preserve the NOL or to entrench management.

Keywords: Taxes, net operating losses, poison pills

JEL Classification: G34, H25, K34, M41

Suggested Citation

Sikes, Stephanie A. and Wilson, Ryan J. and Tian, Xiaoli (Shaolee), Investors’ Reaction to the Use of Poison Pills as a Tax Loss Preservation Tool (February 27, 2014). Journal of Accounting and Economics, Vol. 57, No. 2-3, 2014, Available at SSRN: https://ssrn.com/abstract=2402219

Stephanie A. Sikes (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Ryan J. Wilson

University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Xiaoli (Shaolee) Tian

Georgetown University - Department of Accounting and Business Law ( email )

McDonough School of Business
Washington, DC 20057
United States

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