Effect of Poison Pills on Value Relevance of Earnings

31 Pages Posted: 21 Mar 2002

See all articles by Bin Srinidhi

Bin Srinidhi

University of Texas at Arlington - Department of Accounting; City University of Hong Kong (CityUHK) - Department of Accountancy

Kaustav Sen

Pace University - Lubin School of Business

Date Written: February 2002

Abstract

We show that firms that adopt poison pills exhibit higher asymmetry between reported earnings and stock returns after the adoption and a greater association between reported current earnings and lagged returns. Together, this demonstrates a decreased value-relevance of earnings after adoption. We also show that these firms undertake more Research and Development expenses and long-term investments after poison pill adoptions. Such a change in investment outlook is consistent with increased asymmetry and lower value relevance of earnings. The evidence supports managers' claims that poison pills increase their propensity to make long-term investments. However, we find that the longer-term investments that the managers make result in a decrease in firm value. This is consistent with the argument that entrenched managers undertake difficult-to-monitor long-term projects opportunistically to avoid scrutiny of bad performance and investors who anticipate such opportunistic behavior depress the value of the firm.

Keywords: Poison Pills, Value relevance, R&D expenses

JEL Classification: G34

Suggested Citation

Srinidhi, Bin and Sen, Kaustav, Effect of Poison Pills on Value Relevance of Earnings (February 2002). Pace University Accounting Research Paper No. 2002/01. Available at SSRN: https://ssrn.com/abstract=302646 or http://dx.doi.org/10.2139/ssrn.302646

Bin Srinidhi

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Kaustav Sen (Contact Author)

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
212 618 6413 (Phone)
212 618 6410 (Fax)

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