The Illusory Protections of the Poison Pill
32 Pages Posted: 21 Oct 2002
There are 2 versions of this paper
Date Written: August 15, 2002
Abstract
This paper describes the operation of the standard preferred stock rights plan with a flip-in feature. Rather than a static look at the initial dilution of a bidder's investment when the flip-in rights become exercisable, we examine a dynamic model, where the bidder then proceeds to acquire the remaining shares of the target corporation in a hostile acquisition. We find surprisingly modest levels of dilution from the standard rights plan, amounting to less than 10% of the total value of the target. This modest dilution is primarily a function of the fact that rights provide a one-time dilution when a bidder's investment in the target is relatively modest - no more than 15% of its stock in most cases. While rights plans can destroy part of this value, they generally do not destroy it all. We explore the reasons for the limits of such plans, and the reasons why no one has deliberately swallowed a pill.
Keywords: rights plan, poison pill, takeover defense, dilution
JEL Classification: G34, K22
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Corporate Governance and Equity Prices
By Paul A. Gompers, Joy L. Ishii, ...
-
What Matters in Corporate Governance?
By Lucian A. Bebchuk, Alma Cohen, ...
-
Governance Mechanisms and Equity Prices
By Martijn Cremers and Vinay B. Nair
-
Did New Regulations Target the Relevant Corporate Governance Attributes?
By Reena Aggarwal and Rohan Williamson
-
Governance Mechanisms and Bond Prices
By Martijn Cremers, Vinay B. Nair, ...
-
Corporate Governance and Merger Activity in the U.S.: Making Sense of the 1980s and 1990s
-
Corporate Governance and Merger Activity in the U.S.: Making Sense of the 1980s and 1990s
-
The Costs of Entrenched Boards
By Lucian A. Bebchuk and Alma Cohen