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Poison Pills, Optimal Contracting and the Market for Corporate Control: Evidence from Fortune 500 Firms

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Author Info

  • Atreya Chakraborty

    (Brandeis University)

  • Christopher F. Baum

    ()
    (Boston College)

Abstract

The rationale for issuing poison pill securities remains unclear, despite the findings of a large body of prior research that these defenses adversely affect shareholder wealth. This paper investigates the hypothesis that the adoption of such defenses may reflect shareholders' desire to contract efficiently with their managers in an environment characterized by hostile takeovers and uncertainty about the managers' true performance. Unlike previous research, we focus on financial characteristics of firms as they relate to the motives for adopting such defenses. Our empirical research does not support the optimal contacting hypothesis. We interpret our results as supportive of the managerial entrenchment hypothesis.

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File URL: http://fmwww.bc.edu/EC-P/wp393.pdf
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Bibliographic Info

Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 393.

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Length: 24 pages
Date of creation: 01 Nov 1997
Date of revision:
Publication status: published, International Journal of Finance, 1998, 10:3, 1120-1138.
Handle: RePEc:boc:bocoec:393

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Postal: Boston College, 140 Commonwealth Avenue, Chestnut Hill MA 02467 USA
Phone: 617-552-3670
Fax: +1-617-552-2308
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Web page: http://fmwww.bc.edu/EC/
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Related research

Keywords: corporate control; managerial entrenchment; optimal contracting;

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  1. Holmstrom, Bengt, 1983. "Equilibrium Long-Term Labor Contracts," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 23-54, Supplemen.
  2. Lang, Larry H. P. & Stulz, ReneM. & Walkling, Ralph A., 1989. "Managerial performance, Tobin's Q, and the gains from successful tender offers," Journal of Financial Economics, Elsevier, vol. 24(1), pages 137-154, September.
  3. Andrei Shleifer & Lawrence H. Summers, 1988. "Breach of Trust in Hostile Takeovers," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 33-68 National Bureau of Economic Research, Inc.
  4. Ryngaert, Michael, 1988. "The effect of poison pill securities on shareholder wealth," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 377-417, January.
  5. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-24, January.
  6. Randall Morck & Andrei Shleifer & Robert W. Vishny, 1988. "Characteristics of Targets of Hostile and Friendly Takeovers," NBER Chapters, in: Corporate Takeovers: Causes and Consequences, pages 101-136 National Bureau of Economic Research, Inc.
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