An Investigation of Poison Pill Securities, Long-Term Debt, and the Wealth of Shareholders

James Forjan and Bonnie Van Ness
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James Forjan: York College of Pennsylvania
Bonnie Van Ness: University of Mississippi

American Journal of Business, 2003, vol. 18, issue 2, pages 17-22

Abstract: Poison pill securities can be used to deter takeover activity by making the acquisition cost prohibitive or to increase bargaining power of target firms. Poison pills, which are also known as shareholder rights plans, are typically used in conjunction with other takeover defense mechanisms, such as anti-takeover charter amendments or dual classes of stock. This study examines the role that debt plays as an anti-takeover strategy in the presence of poison pills. The results show that, on average, capital markets have little reaction to poison pill announcements. A regression equation, however, shows that announcement period abnormal returns are positively related to leverage ratios. This paper provides empirical evidence that the capital structure of firms plays an important role in the perceived strength of poison pills.

Keywords: Finance; poison pills; rights plans (search for similar items in EconPapers)
JEL-codes: R00 Z0 (search for similar items in EconPapers)

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