NOL Rights Plans: A Shareholder-Friendly Poison Pill?

Abstract

We study the rise of shareholder right plans aimed at protecting a firm’s net operating loss carryforwards (tax benefit preservation plans). Traditional rights plans are designed to prevent hostile takeovers and have been found to entrench management at the expense of outside shareholders. Tax benefit preservation plans, however, have the potential to benefit shareholders by protecting a potentially valuable corporate asset. Using a sample of firms with publicly available information, we find that entrenchment concerns tend to outweigh the protection of net operating loss carryforwards when firms adopt tax benefit preservation plans. Specifically, we find that abnormal returns are negative at the announcement of a new tax benefit preservation plan. Additionally, firms with such a plan in place experience negative abnormal returns around the Delaware Courts’ decisions validating their use. JEL classification: G38; H25; K34