Capital Structure and Takeover Defences

Dermot Nolan
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Dermot Nolan: Department of Economics, Royal Holloway, University of London

No 99/4, Royal Holloway, University of London: Discussion Papers in Economics from Department of Economics, Royal Holloway University of London

Abstract: In this paper we show how the signalling effect of debt described by Ross (1977) does not work in an environment of hostile takeovers. This is because the effect of debt is to concentrate voting rights in the hands of the incumbent management, "jamming" the signal and preventing any value-enhancing takeover. We show how poison pills, by removing the threat of takeover, can restore the signalling function of debt and increase investment and efficiency. We obtain a large range of prediction about capital structure and takeovers in line with the US experience in the 1980s, and also discuss the relevance of takeover defences of the present takeover wave.

JEL-codes: G32 G34 (search for similar items in EconPapers)
Pages: pages
Date: 2000-02, Revised 2000-02
New Economics Papers: this item is included in nep-cfn and nep-fin
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