Cause and effects of poison pill adoptions by spinoff units

Abstract

We find that units are more likely to adopt poison pills at the time of a spinoff if their parents have anti-takeover provisions in place. In addition, the probability that a spinoff unit adopts a poison pill is negatively related to outside block ownership, but positively related to the size of the unit, institutional ownership, industry takeover activities, and relative industry market-to-book ratio. Units that adopted poison pills elicit a strong negative market response at the time of the spinoff, which implies that investors may believe the pills could prevent the units from being acquired. Despite the initial negative market response, abnormal long-run returns are higher among units that implement poison pills before the spinoff is executed than among units that do not. Moreover, we find that the units’ adoption of poison pills does not reduce their likelihood of being acquired, which suggests that the pills may be intended to increase bargaining power rather than prevent takeovers, and could explain the more favorable long-run abnormal returns.