December 12, 2017

Antitakeover: “Shadow Pills” & Firm Value

In recent years, many companies have either terminated their poison pills or allowed them to expire in response to investor & proxy advisor pressure.  Overall, this hasn’t caused much angst to corporate America – & that’s likely because their ease of adoption means that every company can be regarded as having a pill waiting “on the shelf” to be put in place quickly when needed.

Academic studies are mixed on the impact of explicit poison pills on corporate value – but there’s a new study that looks at the valuation implications of a board’s ability to quickly implement a pill. The study’s conclusions are pretty interesting.  Here’s the abstract:

This paper analyzes the value impact of the right to adopt a poison pill – or “shadow pill” – on long-term firm value, exploiting the natural experiment provided by staggered poison pill law adoptions that validated the use of the pill in 35 U.S. states over the period 1986 to 2009. We document that the availability of a shadow pill results in an economically and statistically significant increase in firm value, especially for firms more engaged in innovation or with stronger stakeholder relationships. Our findings are robust to different specifications, including matching and portfolio analysis, and provide support to the bonding hypothesis of takeover defenses.

So what’s this “bonding hypothesis” of takeover defenses?  It’s the idea that empowering the board to commit the firm to a business strategy that cannot easily be reversed through a takeover promotes the undertaking of long-term projects and stronger stakeholder relationships, thus increasing firm value.

John Jenkins