Journal of Banking & Finance Vol. 20 No. 7 1996
Takeover defenses and wealth effects on securityholders: The case of poison pill adoptions
Abstract
This is the first study to examine the valuation effects of any antitakeover amendment on both bondholders and stockholders. We present new evidence documenting that, on average, there is a significant wealth loss experienced by bondholders at poison pill adoption announcement, while stockholders are unaffected. Our finding of significant bondholder losses is consistent with the proposed negative signal hypothesis. We document results which indicate that bondholders correctly anticipate the degree of leverage increase at the time of the announcement. We also show that the proportion of insider ownership is negatively related to bondholder wealth effect at announcement. This supports the notion that higher insider (manager) ownership leads to a greater alignment of manager-stockholder interests while increasing the stockholder-bondholder agency costs. Long-run analysis of leverage and performance measures reveal that pill adopting firms are not under-leveraged as compared to their industry rivals. However, supporting the negative signal hypothesis, the leverage of sample firms rises significantly after the pill adoption. Performance measures reveal that sample firms significantly underperform their industry cohorts. This result suggests that poison pill adoptions are motivated by poor managers attempting to immunize themselves from the disciplinary actions of the corporate control market.
- DOI
- 10.1016/0378-4266(95)00051-8
- Volume
- 20
- Issue
- 7
- Pages
- 1231-1250
- Language
- en
- Sources
- openalex crossref bibtex:phds-export.bib