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

Yasuhiro Arikawa and Yosuke Mitsusada

Discussion papers from Research Institute of Economy, Trade and Industry (RIETI)

Abstract: 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.

Pages: 35 pages
Date: 2008-02
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Citations: View citations in EconPapers (2)

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