Takeover Defenses and Corporate Governance in Japan

Abstract

Shareholder activism has established its citizenship in the Japanese market. In response to this, an increasing number of Japanese firms have adopted poison pills. There are two conflicting theoretical hypotheses about the effect of poison pills on shareholder value. The managerial entrenchment hypothesis predicts that adopting a poison pill will destroy shareholder value by allowing (incapable)incumbent management to self-defend. The bargaining power hypothesis predicts that adopting a poison pill will enhance shareholder value by strengthening management’s bargaining power. We analyze the information effects of poison pills using a sample of 166 adopting firms from April 2005 to July 2006. There are three key findings: i)the value effect is, on average, negligible, ii)the market values poison pills with prior shareholder consent higher than those without, iii)there exists a “learning effect” both for the market and for the adopting Japanese firms.