Shadow Pills, Visible Pill Policy, and Firm Value

79 Pages Posted: 22 Nov 2017 Last revised: 27 Jan 2022

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame; ECGI

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); American College of Governance Counsel

Michał Zator

University of Notre Dame - Mendoza College of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 11, 2022

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 (PPLs) validating the pill. We document that by reducing uncertainty about pill validity, PPLs make visible pill policy more closely aligned with economic incentives, increasing pill adoption among low-valuation firms but decreasing it among high-valuation firms. Further, PPLs positively impact firm value for innovative firms with more intangible assets, which are more likely to benefit from the commitment to long-term investment strategies.

Keywords: Poison pill, antitakeover statutes, shadow pill, firm value

JEL Classification: G32, G34, K22, O32

Suggested Citation

Cremers, K. J. Martijn and Litov, Lubomir P. and Sepe, Simone M. and Zator, Michał, Shadow Pills, Visible Pill Policy, and Firm Value (January 11, 2022). 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

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

American College of Governance Counsel ( email )

555 8th Avenue, Suite 1902
New York, NY 10018
United States

Michał Zator

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

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