The use of poison pills by US firms over the period 1997-2015: what has been their impact on shareholder value

Simon Hitzelberger,Duarte Pitta Ferraz,Ilídio Tomás Lopes

doi:10.1504/ijbex.2019.10020906

Abstract

Poison pills are controversial devices for which no common conclusion as to how the market reacts to their adoption exists. This research collates 4,479 poison pill adoption events by US companies over the period 1997-2015. Statistically significant insights and positive abnormal returns were found on the day the poison pill was adopted. It is for this reason that we argue in favour of the shareholder wealth-maximisation hypothesis, stating that poison pills protect shareholders by providing management a superior bargaining position. The shareholders react positively to poison pill adoption, particularly if a hostile takeover attempt is anticipated. Furthermore, shareholders seem to value the protective effect of the device, which both provides management a superior bargaining position and allows the maximal possible bid premium to be negotiated.

Highlights

Introduction and scopeOver the last decades, several researches have assessed the impact of an antitakeover statute and how it affects the ability of a firm to defend itself (Ryngaert, 1998; Datta and Iskanadar-Datta, 1996; Sundaramurthy et al, 1997; Goh and Caton, 2008; Sikes et al, 2014; Heron and Lie, 2015; Wanasika and Limbu, 2015; Catan and Kahan, 2016; Schepker et al, 2016)
It is for this reason that we argue in favour of the shareholder wealthmaximization hypothesis, stating that poison pills protect shareholders by providing management a superior bargaining position
Poison pill adoption dates were retrieved from the “Corporate Governance Market Overview” using Eikon, the financial software product by Thomson Reuters

Summary

Data sample

This research follows a positivist approach (Sekaran and Bougie, 2013), with the objective to test cause-and-effect relationships through manipulation (based on the poison pills adoption and its impact over a window of time) and observation (based on the dates of poison pills use, over a long range of time). In order to make full use of the Eventus software for abnormal return calculations, further financial information was added through a Bloomberg Terminal from Bloomberg L.P. The poison pill adoption date range covers the period 1 January 1997–22 December 2015. In order to identify common market reactions to poison pill adoption, this empirical research relies on event study methodology. In order to present the results as accurately as possible, this empirical research is based on a daily event study, using daily return stock data. A common trend of stock market decline after the event of poison pill adoption will be interpreted in favour of the managerial entrenchment hypothesis In this case, shareholders seem to react negatively to the use of anti-takeover protection and seem to be in favour of ownership changes that might be capable of creating value. The period should be isolated from any influence of the event itself

Abnormal return calculations

Findings

Empirical results and discussion