Investors' reaction to the use of poison pills as a tax loss preservation tool

The recent economic downturn resulted in firms generating significant tax losses, which they risked losing if they experienced an ownership change. In response, a number of loss firms adopted poison pill plans. We document a significant negative market reaction to the announcement of 62 poison pill adoptions related to net operating losses (NOLs), suggesting that in general investors do not consider management's claim that the pills are adopted to preserve a valuable tax asset to be credible. However, we find cross-sectional variation consistent with investors considering whether a pill is legitimately adopted to preserve the NOL or to entrench management. (C) 2014 Elsevier B.V. All rights reserved.