Shadow Pills, Visible Pill Policy, and Firm Value

89 Pages Posted: 22 Nov 2017 Last revised: 12 May 2020

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame; ECGI

Scott B. Guernsey

University of Cambridge - Judge Business School

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business; University of Pennsylvania - Wharton Financial Institutions Center

Simone M. Sepe

University of Arizona - James E. Rogers College of Law; University of Toulouse 1 - Université Toulouse 1 Capitole; Toulouse School of Economics; European Corporate Governance Institute (ECGI)

Date Written: May 4, 2020

Abstract

We analyze the impact of the right to adopt a poison pill – a “shadow pill” – on visible 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

Cremers, K. J. Martijn and Guernsey, Scott B. and Litov, Lubomir P. and Sepe, Simone M., Shadow Pills, Visible Pill Policy, and Firm Value (May 4, 2020). European Corporate Governance Institute (ECGI) - Finance Working Paper No. 595/2019. Available at SSRN: https://ssrn.com/abstract=3074658 or http://dx.doi.org/10.2139/ssrn.3074658

K. J. Martijn Cremers (Contact Author)

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

ECGI ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Scott B. Guernsey

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Lubomir P. Litov

University of Oklahoma - Michael F. Price College of Business ( email )

307 West Brooks
Norman, OK 73019-4004
United States

University of Pennsylvania - Wharton Financial Institutions Center

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

Simone M. Sepe

University of Arizona - James E. Rogers College of Law ( email )

P.O. Box 210176
Tucson, AZ 85721-0176
United States

University of Toulouse 1 - Université Toulouse 1 Capitole ( email )

2 Rue du Doyen-Gabriel-Marty
Toulouse, 31042
France

Toulouse School of Economics ( email )

21 allée de Brienne
31015 Toulouse Cedex 6
Toulouse Cedex, F-31042
France

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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