Do Pills Poison Operating Performance?

45 Pages Posted: 9 May 2002 Last revised: 21 Jun 2017

See all articles by Jonathan M. Karpoff

Jonathan M. Karpoff

University of Washington - Michael G. Foster School of Business

Morris G. Danielson

Saint Joseph's University - Department of Finance

Date Written: October 9, 2005

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

Suggested Citation

Karpoff, Jonathan M. and Danielson, Morris G., Do Pills Poison Operating Performance? (October 9, 2005). Journal of Corporate Finance, Vol. 12, 2006, pp. 536-559. Available at SSRN: https://ssrn.com/abstract=304647 or http://dx.doi.org/10.2139/ssrn.304647

Jonathan M. Karpoff (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3200
United States
206-685-4954 (Phone)
206-221-6856 (Fax)

Morris G. Danielson

Saint Joseph's University - Department of Finance ( email )

Philadelphia, PA 19131
United States

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