Poison Pills in the Shadow of the Law

Poison pills are among the most powerful antitakeover provisions, but studying their economic impact is challenging because of the obvious endogeneity concerns. We address the problem by studying U.S. states’ staggered adoption of poison pill laws (PPLs), which strengthen the right to adopt a pill, i.e., the shadow pill, and increase the validity of visible pills. We document that PPLs make visible pill policy aligned with economic incentives, increasing pill adoption among firms with a high likelihood of takeover but decreasing it among firms with low takeover likelihood. We also document that PPLs positively impact firm value, especially for innovative firms with more intangible assets.