The Adoption of Poison Pills and Managerial Entrenchment: Evidence from Japan

The purpose of this paper is to examine the effect of poison pills on shareholder wealth using cases of Japanese firms that announced the adoption of poison pills between April 2005 and May 2006. We find that announcements of poison pill defenses reduce shareholder wealth by a significant amount. We also investigate the relationship between this negative stock price response to poison pills and a manager's incentive for entrenchment, using conditional event study methods. We confirm that the probability of adopting poison pills is higher if CEOs have longer tenure or smaller shareholdings. In such cases, we find that the stock price responds negatively when the performance of the firm is poor because pill adoptions deliver a signal that reveals to investors the manager's tendency toward entrenchment.

The adoption of poison pills and managerial entrenchment: Evidence from Japan

Abstract Using Japanese cases, this paper presents evidence that the adoption of poison pills reveals private information about preferences for managerial entrenchment to the stock market. We find that this private information revelation effect is the reason for the stock price decline with the announcement of poison pill defenses. The stock market considers the adoption of a poison pill to be a signal that the manager wishes to entrench him/herself. We also find that a CEO with longer tenure is more likely to adopt a poison pill when the performance of the firm is poor.Poison pill Takeover defense