Shadow Pills, Pill Policy, and Firm Value
91 Pages Posted: 22 Nov 2017 Last revised: 9 Apr 2021
Date Written: July 8, 2020
We analyze the impact of the right to adopt a poison pill – a “shadow pill” – on pill policy and firm value by exploiting the quasi-natural experiment provided by U.S. states’ staggered adoption of poison pill laws that validate the pill. We document that a strengthened shadow pill promotes the use of actual poison pills and increases firm value – especially for more innovative firms or firms with stronger stakeholder relationships, and for hostile acquisition targets. Our findings suggest shadow pills create value for some firms by reducing their contracting costs with stakeholders and increasing their bargaining power in takeovers.
Keywords: Poison pill, antitakeover statutes, shadow pill, firm value, bonding, bargaining power
JEL Classification: G32, G34, K22, O32
Suggested Citation: Suggested Citation