Finance Series
Shadow Pills, Visible Pill Policy, and Firm Value
Working Paper Author/Authors
University of Notre Dame
Price College of Business, College of Law, University of Oklahoma
The University of Arizona; Université Toulouse-I-Capitole - Toulouse School of Economics; American College of Covernance Council
Abstract
We analyze the impact of the right to adopt a poison pill – a “shadow pill” – on pill policy and firm value by exploiting the quasi-natural experiment provided by U.S. states’ staggered adoption of poison pill laws that validate the pill. We document that a strengthened shadow pill promotes the use of actual poison pills and increases firm value – especially for more innovative firms or firms with stronger stakeholder relationships, and for hostile acquisition targets. Our findings suggest shadow pills create value for some firms by reducing their contracting costs with stakeholders and increasing their bargaining power in takeovers.
