Complementary or Substitutive Effects? Corporate Governance Mechanisms and Poison Pill Repeal

Abstract

A significant amount of research has examined firms’ decisions to adopt poison pills; however, firms today are increasingly repealing or allowing poison pills to expire. Based on agency theory, the authors examine competing perspectives of governance mechanisms as having complementary or substitutive effects within the context of poison pill repeal. They test whether firms repeal poison pills when governance is strong (complementary effects) or allow for other governance mechanisms to compensate for potential agency costs associated with poison pill renewal (substitutive effects). Using a sample of 288 firms who made decisions to terminate or renew poison pills, the authors find that firms with CEO duality, fewer directors nominated by the CEO, and higher levels of outside director ownership and pressure-resistant institutional shareholdings are more likely to repeal poison pills. A curvilinear relationship between managerial ownership and poison pill repeal is also found. The results provide greater support for the notion that firms use governance mechanisms as complements rather than substitutes.

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