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

Atreya Chakraborty () and Christopher Baum ()

No 393, Boston College Working Papers in Economics from Boston College Department of Economics

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.

Keywords: corporate control; managerial entrenchment; optimal contracting (search for similar items in EconPapers)
JEL-codes: G34 G32 D23 (search for similar items in EconPapers)
Date: 1997-11-01
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Published, International Journal of Finance, 1998, 10:3, 1120-1138.

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Persistent link: http://EconPapers.repec.org/RePEc:boc:bocoec:393

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