Stock price crash risk and the adoption of poison pills: evidence from Brazil

Abstract

PurposeThe purpose of this paper is to examine the effect of stock price crash risk on the adoption of poison pills.Design/methodology/approachThe authors estimate logit and probit regressions. Their sample includes 185 Brazilian public firms for the period 2010–2018. Following previous studies, the authors use the negative skewness of firm-specific weekly returns and the down-to-up volatility of firm-specific weekly returns as measures of firm's stock price crash risk. As proxies of poison pills, the authors employ the “conventional” poison pills in their baseline models and the “eternity” poison pills, which prevent the removal of poison pills from bylaws, in additional models.FindingsThe authors find that stock price crash risk measures are not associated with poison pill adoption. However, although stock price crash risk does not lead to poison pill adoption as a complementary corporate governance mechanism that protects firms against hostile takeover attempts, further results show that managers do not draw on stock price crash risk as a pretext to entrench themselves. Additional analyses also highlight that CEO power seems to play a role in moderating the relationship between stock price crash risk and eternity poison pill adoption.Originality/valueThe authors contribute to the literature on stock price crash risk, which calls for research in international contexts to better understand the effect of stock price crash risk on country-specific idiosyncratic features. The authors discuss a controversial anti-takeover mechanism that has been debated by Brazilian policymakers.

Poison pills adoption, real earnings management and IPO failure

“…Second, we contribute to the literature on poison pills because, to the best of our knowledge, this is the first study to examine the effect of poison pill adoption on IPO failure. Thus, we complement previous research (Azevedo, Schwarz, Gomes, & Ambrozini, 2023; Bhargava, Faircloth, & Zeng, 2017; Bhojraj, Sengupta, & Zhang, 2017; Eldar & Wittry, 2021) by examining whether poison pill adoption contributes to IPO failure.…”

“…Previous research on corporate governance mechanisms shows that board interlocking (Davis, 1991), CEO tenure (Arikawa & Mitsusada, 2011), executive compensation plans (Azevedo et al, 2023), institutional ownership (Bhojraj et al, 2017) and staggered boards (Heron & Lie, 2015) are corporate governance practices that determine the adoption of poison pills, whereas board size (Azevedo et al, 2023;Loh, 1994) and CEO/managerial ownership (Al Dah, Michael, & Dixon, 2017;Arikawa & Mitsusada, 2011;Heron & Lie, 2006 influence negatively. However, previous literature findings also diverge regarding the relationship CAFR 25,4 between the adoption of poison pills and board independence.…”

“…Previous research on corporate governance mechanisms shows that board interlocking (Davis, 1991), CEO tenure (Arikawa & Mitsusada, 2011), executive compensation plans (Azevedo et al. , 2023), institutional ownership (Bhojraj et al.…”

“…, 2023), institutional ownership (Bhojraj et al. , 2017) and staggered boards (Heron & Lie, 2015) are corporate governance practices that determine the adoption of poison pills, whereas board size (Azevedo et al. , 2023; Loh, 1994) and CEO/managerial ownership (Al Dah, Michael, & Dixon, 2017; Arikawa & Mitsusada, 2011; Heron & Lie, 2006, 2015) influence negatively.…”

“…Previous research shows that leverage and R.D. expenditures are positively associated with adopting poison pills (Eldar & Wittry, 2021), whereas firm performance, sales growth and excess cash are negatively associated (Azevedo et al. , 2023).…”