The Influence of Poison Pills on Executive Compensation

Abstract

We examine whether the poison pills influence on the executive compensation of Brazilian publicly-traded firms, considering that there is a particularity of this anti-takeover device in Brazilian firms when compared to US firms, since the managers can include in the company's bylaws an "eternity" clause that prevents poison pills change or removal, which may lead to a managerial entrenchment, maintaining managers privileges in the detriment of minority shareholders, including increases in the executive compensation levels. To test our hypotheses, we use a sample of 217 Brazilian publiclytraded firms listed on B3 with available data on Bloomberg® database and Brazilian Securities Exchange Commission website between 2010 and 2017. We use the total, fixed and variable compensations as proxies for executive compensation. However, to mitigate several outliers of these variables, we use the quantile regression as a robust alternative to the extreme sensitivity of the ordinary least squares estimator to modest amounts of outliers. Our main results show that poison pills have a positive influence on total, fixed and variable executive compensation. Furthermore, in an exploratory way, our results show that these "eternity" poison pills also have a positive influence on these proxies of executive compensation. These findings are consistent with the entrenchment hypothesis that since managers are protected in their positions, they may obtain private benefits at the expense of shareholders, such as higher levels of executive compensation. In this sense, our study contributes to the literature by showing that although reducing the risk of a hostile takeover, the poison pills are incurring in an additional agency cost for shareholders that not always leads to the reduction of conflicts between managers and shareholders since these anti-takeover defenses seem not being adopted in the Brazilian context to benefit the shareholders, but to protect managers in their positions.

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

“…These levels are consistent with those in prior literature (Azevedo et al. , 2021; Azevedo and Nakao, 2019; Portulhak et al. , 2017) and indicate that the adoption of poison pills is increasing over time by Brazilian publicly-traded firms given that only seven firms adopted poison pills in 2006 (Vieira et al.…”

“…An “eternity poison pill” makes amendments difficult to pass, signaling managerial entrenchment since shareholders are virtually hampered from promoting changes in poison pill clauses (or even their removal). Prior evidence suggests that eternity poison pills may be used to perpetuate managers in their positions (Maestri, 2011), allowing them better benefits, such as higher levels of executive compensation (Azevedo and Nakao, 2019) and reduced accounting information quality (Azevedo et al. , 2020).…”

“…(2) We explore a different setting because, unlike Anglo-Saxon countries, Brazil is classified as a poor governance country, with weak legal protection for investors (Cris ostomo et al, 2020;Martins et al, 2017). In this context, firms could adopt eternity poison pills making it practically impossible for shareholders to change or remove this anti-takeover defense (Azevedo and Nakao, 2019). This allowed us to empirically test the entrenchment hypothesis proposed by Bhargava et al (2017) and, consequently, expand previous evidence by examining if, in some circumstances, stock price crash risk could be associated with an aggressive managerial entrenchment' mechanism, namely eternity poison pills.…”

“…, 2017). In this context, firms could adopt eternity poison pills making it practically impossible for shareholders to change or remove this anti-takeover defense (Azevedo and Nakao, 2019). This allowed us to empirically test the entrenchment hypothesis proposed by Bhargava et al.…”

Poison pills e governança corporativa: um estudo no mercado acionário brasileiro

“…In this manner, this article fills a gap in studies that analyze poison pills within the Brazilian context, because despite the existence of evidence related to the theoretical-conceptual aspects and legal dispositions applicable to their adoption (Vieira et al, 2009), and their quantity and peculiarities in the Brazilian context (Ambrozini, Pimenta, & Gaio, 2015), as well as the effects of anti-takeover devices (Portulhak et al, 2017;Azevedo & Nakao, 2019), until now, this is the first study to investigate the aspects associated with the adoption of poison pills by Brazilian publicly-traded companies.…”