The stock market stress caused by the onset of the COVID-19 outbreak generated an ideal situation for cash-rich activists to buy strategic equity positions in target firms. Distinguishing low stock valuations due to bad management decisions, potentially necessitating an activist campaign, from the systematic blow due to the pandemic’s economic impact, may have been too difficult under the circumstances we observed in the early months. Some of these activist campaigns may end up destroying firm value through the unnecessary disruption of management activities. The question that arises is how management responds to deter such activists. One such action can be the adoption of poison pills, once a common feature of firms’ governance structures, that have mostly disappeared in the recent past. In the paper “Crisis Poison Pills,” Ofer Eldar and Michael D. Wittry investigate this question starting from the observation that over 70 pills were adopted by U.S. firms following the outbreak. Ofer and Michael find that these “crisis pills” have lower triggers, shorter durations, and are mostly aimed at deterring accumulations of equity stakes by activist investors. The paper investigates the stock market response and finds a positive stock price reaction associated with the adoption of these crisis pills specifically designed to deter disruptive stock acquisitions by activist investors. The authors are very careful in not making any causal inferences because firms choose this route to address their idiosyncratic challenges. This said, these results suggest a more nuanced view of the impact arising from the adoption of poison pills depending on market conditions: the decisions to adopt crisis pills aimed at staving off activist campaigns that could have been disruptive were not perceived by the market as hurting firm value.
Spotlight by Andrew Ellul
Photos courtesy of Ofer Eldar and Michael D. Wittry
First published December 30, 2020