Effect of Poison Pills on Value Relevance of Earnings
31 Pages Posted: 21 Mar 2002
Date Written: February 2002
We show that firms that adopt poison pills exhibit higher asymmetry between reported earnings and stock returns after the adoption and a greater association between reported current earnings and lagged returns. Together, this demonstrates a decreased value-relevance of earnings after adoption. We also show that these firms undertake more Research and Development expenses and long-term investments after poison pill adoptions. Such a change in investment outlook is consistent with increased asymmetry and lower value relevance of earnings. The evidence supports managers' claims that poison pills increase their propensity to make long-term investments. However, we find that the longer-term investments that the managers make result in a decrease in firm value. This is consistent with the argument that entrenched managers undertake difficult-to-monitor long-term projects opportunistically to avoid scrutiny of bad performance and investors who anticipate such opportunistic behavior depress the value of the firm.
Keywords: Poison Pills, Value relevance, R&D expenses
JEL Classification: G34
Suggested Citation: Suggested Citation