State Poison Pill Endorsement Statutes and the Market for Corporate Control

This paper provides evidence that poison pill endorsement statutes, and to a lesser degree, other constituency statues, harm shareholders. Exploiting the variation in such laws at the state level, I show that a firm incorporated in a state with either a poison pill endorsement or other constituency statute has a 1.3% lower expected likelihood of receiving a bid, a large difference considering the typical likelihood of receiving a bid is about 5%. I also show that conditional on receiving a bid, the wealth effect around bid announcement is 2% to 3% lower with a diminished likelihood that other bidders challenge the initial bid for firms incorporated in a state with a pill endorsements statute. This suggests that poison pill endorsement statutes lead to a less competitive market for corporate control. If Delaware’s success in attracting firm charters is a result of its permissive stance towards managers in change of control situations, the results of this paper support the “race to the bottom" view in the literature.