The Value of Takeover Defenses

This paper offers the first study of the shareholder welfare effects of poison pills and control share acquisition statutes in a research design that can support causal inference. We examine a series of four events between 2004 and 2010 that suddenly and exogenously changed the legality of poison pills and control share acquisition statutes for a peculiar class of company known as a closed-end fund. In the first two events, a court held for the first time that these defenses were legal under the Investment Company Act of 1940. In the latter two events, the SEC officials expressly rejected the court’s decision, rendering these defenses effectively illegal. We show that as poison pills and control share acquisition statutes became more legal, closed-end fund stock prices increased; and as these defenses became less legal, closed-end fund stock prices decreased. We find, in other words, that closed- end fund shareholders liked the poison pill.