Do Poison Pills Increase Firm Risk?

Authors

Thomas Turk, Chapman UnviersityFollow
Jeremy C. Goh, Singapore Management UniversityFollow
Candace Ybarra, Chapman UniversityFollow

Document Type

Article

Publication Date

2008

Abstract

Management scholars have argued that an active takeover market discourages risk-taking by managers and that takeover defenses serve to counter the risk-reducing pressures of an active takeover market. This study employs the Black and Scholes Option Pricing Model to determine whether or not adoption of poison pill securities increases investor perceptions of firm risk. The results provide evidence that the Option-Implied Standard Deviations of common stock returns increase significantly on the poison pill adoption date, on average. Furthermore, the implied standard deviations remained significantly above pre-adoption levels for several days after the poison pill adoption, suggesting that the perceived increase in firm risk is permanent. These results suggest the poison pills may serve a more constructive role in the governance of publicly traded firms than is generally assumed.

Comments

This article was originally published in Corporate Ownership & Control, volume 5, issue 3, in 2008. https://doi.org/10.22495/cocv5i3p5

Recommended Citation

Turk, T. A., Goh, J., & Ybarra, C. E. (2008). Do poison pills increase firm risk? Corporate Ownership & Control, 5(3), 47-53. https://doi.org/10.22495/cocv5i3p5

Peer Reviewed

1

Copyright

The authors

Creative Commons License

This work is licensed under a Creative Commons Attribution-Noncommercial 4.0 License