Flying Off the Shelf? Poison Pill Adoptions in Response to Takeover Attempts and Other Activism

Abstract

The likelihood that a firm will adopt a poison pill in response to hedge fund activism increases in the target firm’s pre-adoption takeover probability and in the CEO’s board influence, implying that some pills are intended to protect shareholders and others to protect management. Pills adopted in response to hedge funds appear to protect management, since the stock market reacts negatively, the probability of acquisition decreases, firms have worse long-term performance, and hedge funds are less likely to achieve their activism goals. We show that poison pills play both a direct and a signaling role in impeding hedge fund activists. ∗We thank Daniel Bergstresser, Erik Lie, Ralph Walkling and participants of seminars at Brandeis University and the University of Massachusetts at Lowell for helpful suggestions. †Northeastern University, 413 Hayden Hall, 360 Hungtington Ave, Boston, MA 02115. 617-373-4775, fax: 617-373-8798 n.boyson@neu.edu ‡Northeastern University, 413 Hayden Hall, 360 Hungtington Ave, Boston, MA 02115. 617-373-4572, fax: 617-373-8798 p.pichler@neu.edu.