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The Insignificance of Clear-Day Poison Pills
Emiliano M. Catan
ABSTRACT
Exploiting a hand-collected database with almost 2,200 firms during 1996-2014, I analyze
the relationship between the presence of poison pills and firm value. Consistent with earlier
results, I document a strong negative association between pills and firm value cross-sectionally
and within firm. However, I document that al the within-firm association is driven by pill
adoptions (and none by the dropping of pills), al the drop in value associated with adoptions
precedes the pills' adoption, and firms adopted their pills after experiencing drops in their
operating performance. These results indicate that the ostensive negative effect of pills on firm
value is due to a spurious correlation and that prior analyses were incorrect in concluding that
pill adoptions are harmful and indicative of bad governance. Moreover, the results question the
usefulness of the dramatic drop in the incidence of pills that took place during the Last decade.
1. INTRODUCTION
The creation of the poison pill was one of the most innovative pieces of
corporate lawyering of the past 30 years. Pills were a game changer: they
allowed the board of directors of a corporation targeted by a tender offer
to have a say in the offer even though-unlike in the case of a merger-
the board does not have any statutory role in such an offer. The poison
pill was revolutionary for several reasons. First of all, the pill gave the
EMILIANO M. CATAN is Professor of Law at New York University (NYU) School of Law. I
thank Hunt Allcott, Bill Allen, Jennifer Arlen, Ryan Bubb, John Coates, Dhammika Dhar-
mapala, Ron Gilson, Jeff Gordon, Joseph Grundfest, William Hubbard, Wei Jiang (dis-
cussant), Marcel Kahan, Michael Klausner, David Larcker, Florencia Marotta-Wurgler,
Patrick McGurn (discussant), Cecilia Parlatore, Roberta Romano (discussant), Philipp
Schnabl, Holger Spamann, Eric Talley, and Jeff Wurgler; participants at seminars at the
New York University School of Law, Boston University School of Law, the University of
Chicago Law School, Harvard Law School, Stanford Law School, Columbia Law School,
the NYU-Penn Conference on Law and Finance, and the NYU Corporate Roundtable;
and participants at the meetings of the American Law and Economics Association, the
Canadian Law and Economics Association, and the Society for Empirical Legal Studies
for comments. I thank Robert Geren for valuable research assistance.
[Journal of Legal Studies, vol. 48 (January 2019)]
© 2019 by The University of Chicago. All rights reserved. 0047-2530/2019/4801-0001$10.00
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