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Poison Pill Securities: Shareholder Wealth and Insider Trading
Author(s) -
Loh Charmen
Publication year - 1992
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1992.tb01316.x
Subject(s) - insider , pill , shareholder , business , insider trading , monetary economics , stock (firearms) , financial system , corporate governance , finance , economics , law , medicine , mechanical engineering , political science , pharmacology , engineering
Existing empirical studies on poison pill securities have examined their overall effect on shareholder wealth. This paper segregates the wealth‐increasing poison pills from the value‐reducing ones by examining the pattern of insider trading activity prior to the pill adoption announcement. Our results show that pill adoptions that are preceded by net insider purchases are associated with significant stock price increases. This finding is consistent with the proposition that corporate insiders buy their own securities because they do not view the adoption of poison pills as an antitakeover strategy, but rather one that enables the board of directors to extract a greater share of the economic gains from the bidder. Our findings also indicate that firms with net insider sales prior to pill adoption announcement experience generally negative but insignificant changes in value. Finally, firms with no insider trading or with an equal number of insider purchases and sales register marginally significant negative returns.