Shareholder Beware? Examining NOL Poison Pill Adoptions

This study examines whether or not a specific and unilateral action taken by the board of directors, the adoption of a net operating loss (NOL) poison pill, promotes shareholder interests, by examining the factors that are influential in the adoption decision. NOL poison pill adoptions are unique in that the board of directors cites the need to protect a firm’s ability to use its NOL carryforwards in the future, rather than to protect the firm from a specific takeover threat. To address my research question, I examine the firm characteristics associated with NOL poison pill adoptions and find that the relative size and the expectation of future changes in the NOL carryforward are influential in the adoption decision. Further, I find that firms are less likely to adopt an NOL poison pill when corporate governance is weaker. In additional analysis, I also find that NOL poison pill adoption characteristics are different from that of traditional poison pill adoptions and NOL poison pill adoptions are positively associated with future earnings. Overall, results suggest that the adoption of an NOL poison pill by the board of directors promotes shareholder interests and that shareholder concerns could be misplaced.