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

Author

Listed:
  • 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.

Suggested Citation

  • Atreya Chakraborty & Christopher F. Baum, 1997. "Poison Pills, Optimal Contracting and the Market for Corporate Control: Evidence from Fortune 500 Firms," Boston College Working Papers in Economics 393, Boston College Department of Economics.
    • Handle: RePEc:boc:bocoec:393
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    File URL: http://fmwww.bc.edu/EC-P/wp393.pdf
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    References listed on IDEAS

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    1. 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.
    2. Bengt Holmstrom, 1980. "Equilibrium Long-Term Labor Contracts," Discussion Papers 414R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    3. 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.
    4. 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.
    5. Hayashi, Fumio, 1982. "Tobin's Marginal q and Average q: A Neoclassical Interpretation," Econometrica, Econometric Society, vol. 50(1), pages 213-224, January.
    6. Malatesta, Paul H. & Walkling, Ralph A., 1988. "Poison pill securities : Stockholder wealth, profitability, and ownership structure," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 347-376, January.
    7. 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.
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    Cited by:

    1. Gine, Mireia & Moussawi, Rabih & Sedunov, John, 2017. "Governance mechanisms and effective activism: Evidence from shareholder proposals on poison pills," Journal of Empirical Finance, Elsevier, vol. 43(C), pages 185-202.

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    More about this item

    Keywords

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    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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