The Insignificance of Clear-Day Poison Pills

Abstract

Exploiting a hand-collected database with over 2100 firms during 1996-2014, I analyze the relationship between the presence of poison pills and firm value (Tobin’s Q). Consistent with earlier results, I document a strong negative association between pills and firm value cross-sectionally and within firm. However, I document that (a) all the within-firm association is driven by pill adoptions (and none by the dropping of pills); (b) all the drop in value associated with adoptions actually precedes the pills’ adoption; and (c) firms adopted their pill after experiencing sharp, largely temporary, drops in their operating performance. These results indicate that the ostensive negative effect of pills on firm value is due to reverse causality, and that prior analyses were incorrect in concluding that pills are harmful and using pills as indicators of “bad governance”. Moreover, the results call into question the usefulness of the dramatic drop in the incidence of pills that took place during the last decade due to the pressure of ISS and institutional investors.

Keywords: Corporate Governance; Law and Finance; Corporate Law; Mergers and Acquisitions; Poison Pills; Takeovers; Anti-Takeover Devices

JEL Classification: G32, G34, K22