Shadow Pills and Long-Term Firm Value

We analyze the impact of the right to adopt a poison pill – a “shadow pill” – on visible pill policy and firm value by exploiting the quasi-natural experiment provided by U.S. states’ staggered adoption of poison pill laws (PPLs) validating the pill. We document that by reducing uncertainty about pill validity, PPLs make visible pill policy more closely aligned with economic incentives, increasing pill adoption among low-valuation firms but decreasing it among high-valuation firms. Further, PPLs positively impact firm value for innovative firms with more intangible assets, which are more likely to benefit from the commitment to long-term investment strategies