Poison Puts: Corporate Governance Structure or Mechanism ...
Transcript of Poison Puts: Corporate Governance Structure or Mechanism ...
Poison Puts:
Corporate Governance Structure or Mechanism for Shifting Risk?
Frederick L. Bereskin
Assistant Professor
Department of Finance
Lerner College of Business & Economics
University of Delaware, Newark, DE 19716
Helen Bowers
Associate Professor
Department of Finance
Lerner College of Business & Economics
University of Delaware, Newark, DE 19716
September 8, 2015
Abstract
A poison put, also referred to as an event-risk or change-in-control covenant, gives the
bondholder the option of redeeming the bond before maturity if a specified event occurs,
such as a change in control. We investigate the association of poison puts with corporate
governance and their effects on firms’ merger activity. We do not find evidence that poison
puts are associated with weaker governance. Rather, our evidence is most consistent with
poison put issuance being driven by efficient contracting for bondholders, as opposed to
managerial entrenchment. However, we also find that firms that issue poison puts are less
likely to be either acquirers or targets, even though these firms are more likely to be in
industries with acquisition activity. Other findings are consistent with an explanation based
on efficient contracting – issues with poison puts exhibit other characteristics that we would
also expect for bondholders who are concerned about potential risk-shifting – such as
shorter maturity, higher treasury spreads, and significantly more covenants.
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1 Introduction
Poison puts (also referred to as proxy puts, change in control, or event risk covenants)
give bondholders the right, but not the obligation, to redeem their bonds if a change in control
occurs. These covenants give bondholders a put option requiring the issuer to offer to purchase
all of the bonds (typically at 101% of par), when changes in control occur.1 Poison puts have
traditionally been seen as the result of efficient contracting by bondholders to minimize their
agency costs by protecting against risk-shifting from highly levered transactions or being
acquired by firms with lower debt ratings. The effectiveness of covenants in this context has
been studied by Asquith and Wizman (1990). They found that even though, on average, the
bondholders of successful leveraged buyouts and restructurings over the period 1980-1988
experienced negative returns, bonds with relatively strong covenant protection gained value.
Asquith and Wizman’s (1990) results also show that the covenants that were most effective in
increasing bond value during this period functioned similarly to poison puts because the increase
in bond value was related to those bonds being more likely to be called than unprotected bonds.
The 2014 acquisition of Tim Hortons Inc. by Burger King Worldwide Inc. is a more
recent example of the use of poison puts for efficient contracting by bondholders. Burger King’s
debt was rated five levels below Tim Hortons’ investment grade debt. However, instead of
experiencing a loss due to a ratings downgrade resulting from the acquisition, Tim Hortons’
1 Specifically, changes in control are generally defined as one or more of the following events: 1) any person or
group acquires 50% or more the issuer’s voting stock; 2) any time the majority of the board of directors ceases to be
those who were directors at the time of issuance (continuing directors) or directors whose election was approved by
a majority of the continuing directors (related to this are the notion of “dead hand” proxy puts; without the “dead
hand” feature, board can approve the dissident slate of directors to avoid triggering the put – see Reindel (2015) for
more detail); 3) the merger or consolidation of the company into another entity; 4) the sale, in one or a series of
related transactions, of all or substantially all of the company’s assets; or 5) the adoption of a plan to dissolve or
liquidate the company. Some poison put covenants include a “double trigger” where the change in control event
must be associated with a ratings downgrade.
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bondholders were protected by poison puts that allowed them to redeem their issues at a slight
premium to par.2
However, poison puts, like any anti-takeover defensive measure can also serve to
entrench management. A recent New York Times article suggests that management is active in
placing poison put covenants in indenture agreements for the purpose of entrenchment
(Solomon, 2014). Poison puts are described as “tools companies use to forestall shareholder
activists and hostile takeovers.” This argument places poison puts in the corporate governance
arena as a mechanism of circumventing shareholder rights. Poison puts cause an additional
concern because they are debt covenants and therefore, unlike poison pills, sidestep scrutiny as a
takeover defense that could impinge on the shareholder franchise. Inclusion of a poison put in a
debt covenant entails less conflict among shareholders than putting poison pill provisions in
place – and are generally implemented without shareholder votes. Consequently, poison puts are
an example of an “unregulable” takeover defense (Arlen and Talley, 2003) in that they can be
imposed through contractual arrangements, and difficult to pinpoint as purely entrenching.
Moreover, in contrast to poison pills, poison puts have the potential to significantly harm the
firm, and not merely the acquirer. As a result of their potential for significant damage to the firm,
their ability to be imposed without shareholder scrutiny, and their widespread and increasing use,
it is important to understand their implications in greater detail.
Decisions in two seminal cases in the Delaware Chancery Court, San Antonio Fire &
Police Pension Fund v. Pharmaceuticals, Inc.3 and Kallick v. SandRidge Energy,4 dealt with
2 C. Gutscher, “Tim Hortons poison put leaves creditors with indigestion”, BloombergBusiness, Aug 27, 2014,
Retrieved http://www.bloomberg.com/news/articles/2014-08-27/tim-hortons-put-leaves-holders-with-indigestion-
canada-credit on Mar 2, 2015. 3 San Antonio Fire and Police Pension Fund v. Amylin Pharms., Inc. 983 A.2d 304 (Del. Ch. 2009). 4 Kallick v. Sandridge Energy, Inc.68 A.3d 242 (Del. Ch. 2013).
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boards of directors’ responsibilities to protect stockholders from possible entrenchment effects
around triggering events in poison put covenants. Both cases were decided on narrow grounds,
but Byeff (2015) argues that because those poison puts that were triggered by the replacement of
the majority of the company’s continuing directors, that poison puts can “have both the motive
and effect of entrenching incumbent directors” and “that board entrenchment purposes had
trumped potential agency cost reduction.”5 Although not endorsing the argument that poison
puts exist solely to entrench management, the Delaware Chancery Court’s 2013 decision in
Kallick recognizes that management can adopt them solely for that purpose. The Kallick
decision states that, in light of the potential entrenching effects of poison puts, companies should
strenuously bargain to exclude puts and accept them only in exchange for significant economic
benefits and charges independent directors to monitor poison puts to ensure that they are not
being adopted solely as entrenchment devices.
Another avenue through which poison puts may entrench management is by discouraging
activist investors. Reporting on bank loans, Hoffman (2015) states that “nearly 200 companies
have struck new loan agreements since the beginning of 2014” that include poison put
provisions. He argues that the increase in activist investors, particularly hedge funds,
necessitates poison puts to protect lenders from the debt-financed buybacks, dividends, and
restructurings, favored by such investors, which deteriorate credit. Poison puts are a unique
means of entrenchment, because debtholders can argue that it is in their economic interest to
know their borrowers and have faith that the business plan at the time of the issue will continue
for the life of the loan. The increased focus given to poison puts in the courts and the popular
press is understandable – despite their widespread attention in the early 1990s, their use has
5 See Byeff (2015) pp. 375 and 415.
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become significantly more common in recent years. For example, poison puts were included in
over half of our sample debt issues in 2012, compared to a range of 8.1%-27.4% of debt issues in
our sample in the 1990s.
The purpose of our study is to investigate the association of poison puts with corporate
governance and their effects on acquisition activity. We examine these two, non-mutually
exclusive motivations for the inclusion of the poison put covenants. Poison puts could: (1)
increase the agency costs associated with acquisitions, by potentially enhancing managerial
entrenchment; or (2) protect bondholders from risk-shifting and associated wealth transfers that
could result from acquisitions (i.e., efficient contracting).
We do not find evidence that poison puts are associated with weaker governance.6 In
particular, firms with bonds that have poison puts are more likely to have the characteristics of
firms with strong corporate governance. Firms with bonds that have poison put covenants have
slightly higher levels of institutional ownership, are less likely to have poison pills, and are no
more or less likely to have classified boards. However, we also find that firms with bonds that
have poison puts are more likely to be incorporated outside of Delaware7 and are less likely to be
either acquirers or targets, even though these firms are more likely to be in industries with
acquisition activity. Consistent with an explanation based on efficient contracting, issues with
poison puts exhibit other characteristics that we would also expect for bondholders who are
concerned about potential risk-shifting. In particular, issues with poison put covenants tend to
have shorter maturities and higher treasury spreads (thus reflecting the risk), and significantly
more covenants – both bondholder-protective covenants and issuer-restrictive. Our multivariate
6 We define governance as “weak” or “strong” from the shareholder’s perspective, in terms of shareholder rights. 7 Daines (2001) notes that firms incorporated in Delaware are more vulnerable to takeovers.
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results confirm these findings, in that firms with more contracting-issues (both issue-specific and
firm-specific) are more likely to include poison puts in their bonds. In contrast, we find no
evidence of these firms having weaker corporate governance or being more prone to managerial
entrenchment aside from entrenchment caused by the poison put itself. It is worth stressing that
the additional covenants that are present among bonds with poison puts are particularly
consistent with protection to bondholders from acquisition-related risk-shifting (as one would
expect from the contracting-based explanation), as opposed to manager-specific and board-
specific restrictions on their investment activity and dividend policy.
An alternative explanation for the generally strong governance of firms with poison puts
is that these covenants could be one of the few means of entrenchment for these types of firms.
Poison puts are not voted on by shareholders, and their effects are not widely understood,
compared to other means of entrenchment.
We then examine the effects of poison puts, in contrast to their motivation, and analyze
our data in the context of acquisition activity. Poison puts appear to matter in that firms that had
bonds with poison puts are less likely to be either acquirers or targets. Similarly, our regression
results confirm that these firms are more likely to be in industries with acquisition activity.
Together, these results suggest that bonds are more likely to contain poison puts if the issuing
firms are more prone to acquisitions and in industries experiencing consolidation. Combined
with our earlier results on governance and these firms’ contracting environments, our findings
are consistent with these firms’ use of poison puts being driven by bondholders’ risk-shifting
concerns. The effects of the firms experiencing fewer acquisition activity are also consistent with
poison puts having an entrenchment effect.
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Nonetheless, we are unable to find consistent evidence that firms without poison puts
experience more risk-shifting. This is not to say that poison puts are not effective at mitigating
risk-shifting. One may expect that other firms mitigate risk-shifting and protect bondholders in
other ways, whereas the type of firm that adopts poison puts does so out of limited alternative
mechanisms.
Our results have a number of interesting implications. First, we contribute to the literature
by focusing on the governance implications and determinants of poison puts, which are not
widely studied despite their widespread use and potential agency problems. Given our findings
that firms issuing bonds with poison puts have reasonable shareholder governance and no
significantly higher levels of managerial entrenchment (beyond the poison puts themselves), our
results help explain why poison puts remain so prevalent. Moreover, their increased use may in
part be driven by improved shareholder protection, to the degree that bondholders are more
concerned about risk-shifting occurring.
Our paper also presents evidence that firms are not opportunistically employing poison
puts to position themselves as stronger acquirers. In contrast, poison puts are used by firms in
consolidating industries that wish to avoid acquisition activity in general, which admittedly could
also reflect an entrenchment effect. Poison puts are a manifestation of an environment in firms
that have a unique contracting environment with bondholders, managers, and other parties.
Finally, our lack of evidence of risk-shifting occurring is consistent with poison puts not being
detrimental to bondholders. At the very least, they appear to offer a mechanism to protect
bondholders who would otherwise not have credible forms of commitment.
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Our study also contributes to the broader literature of creditors’ role in corporate
governance, and the mechanism by which their involvement occurs.8 Moreover, whereas other
studies may focus on how particular covenants alleviate the bondholder-shareholder conflict,
poison puts also highlight the shareholder-manager conflicts as well.
Our paper continues as follows. In Section 2, we discuss the related literature, and build
on it to develop our hypotheses. We review our data set and results in Section 3. Concluding
remarks follow in Section 4.
2 Literature Review
2.1 Pricing and value effects of poison puts on stockholders and bondholders
The seminal work on poison put bonds dates to Crabbe (1991) and Cook and Easterwood
(1994). Crabbe (1991) finds that over the period 1983-1988, the inclusion of event-risk
protection reduced borrowing cost by approximately 20 to 30 basis points. Although his
evidence is consistent with bondholders valuing these covenants, he also finds evidence that this
effect declined with the reduction in corporate restructurings towards the end of his sample
period.9 Cook and Easterwood (1994) compare the wealth effects on the existing debt and equity
of firms issuing debt with poison put covenants with firms issuing debt without poison puts
during 1988 and 1989. For issuers of poison put debt, stockholders experience an abnormal
8 For example, recent studies have examined creditors’ role on the board of directors (Santos and Rumble, 2006),
information intermediation (Ivashina et al., 2009), or focused on creditors’ role among firms experiencing financial
distress (Baird and Rasmussen, 2006; Chava and Roberts, 2008; Ayotte and Morrison, 2009; Roberts and Sufi,
2009; Nini, Smith, and Sufi, 2012). 9 Crabbe (1991) restricts his sample to bond issues with “super poison put” covenants. In the more recent literature
this type of put is usually described as having a “double trigger” where the change in control event must be
associated with a ratings downgrade.
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return of negative 70 basis points, while existing bondholders experience a positive abnormal
return of 52 basis points. There is no wealth reaction for stockholders and existing bondholders
associated with non-poison put debt. Cook and Easterwood’s (1994) evidence is consistent with
the “mutual interest” hypothesis that poison puts protect both managers and bondholders, at the
expense of shareholders.
Torabzadeh, Roufagalas and Woodruff (2000) find, in a sample spanning 1986 through
1990, that the inclusion of a poison put reduced yields by 58 to 79 basis points. Using a case
study approach, Okamoto, Pedersen, and Pedersen (2011) exploit court decisions regarding the
buyout of Bell Canada Enterprises to show that poison puts are, indeed, priced by the market.
2.2 Returns for change of control events and risk-shifting
Billett, Jiang, and Lie (2010) study the effect of poison puts on leveraged buyouts over
the period 1980-2006. In particular, they show that upon the announcement of a leveraged
buyout, bondholders with poison puts experience average wealth effects of 2.3%; this compares
to -6.8% for bonds without poison puts. Additionally, they find that poison puts reduce the
probability of being targeted in both LBO and non-LBO takeovers. Their results are also
consistent with Asquith and Wizman’s (1990) results concerning LBOs occurring between 1980
and 1988. They found that the buyout announcement return for bonds with strong covenant
protection is 2.6%; this compares to announcement returns of -0.7% for bonds with weak
protection and -5.2% for those with no protective covenants.
Billett, King, and Mauer (2004) study acquisitions between 1979 and 1997; although the
magnitude of their results is not as large as those found for leverage buyouts, they conclude that
there is a coinsurance effect or risk-shifting associated with acquisitions. They find that returns
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for target bondholders are significantly higher when the target’s debt rating is below the
acquirer’s, when the combination is expected to decrease leverage for the target, and when the
target’s maturity is shorter. Overall, they find an abnormal return on announcement for target
bondholders of 1.09%. However, for targets’ debt rated below investment grade, the
announcement return the announcement abnormal return is 4.30%. The abnormal announcement
return for acquirer bondholders is -0.17%, and there is no significant difference between
investment grade and non-investment grade debt.
Lehn and Poulsen (1991) conclude that the use of event-risk covenants, such as poison
puts, was the response to the risk-shifting and consequent large losses experiences by target
firms in LBOs. They found that alternative defenses against risk-shifting, such as hedging and
the use of convertible debt, did not increase after the buy-outs and restructurings of the 1980s.
2.3 Firm characteristics of issuers with poison puts
Nash, Netter, and Poulsen (2003) find that firms with high-investment opportunities were
more likely to issue bonds with poison puts in 1989 than in 1996. Their results show that firms
that have bond issues with poison put covenants tend to have lower interest coverage ratios, and
that non-investment grade debt is not driven by firms’ investment opportunities – rather, it is
largely driven by the likelihood of financial distress. Their evidence is consistent with bond
contracts being carefully negotiated, depending on the firm’s and investors’ goals, as opposed to
being “boilerplate” documents.
The use of covenants (such as poison put covenants) is positively associated with growth
opportunities, debt maturity, and leverage, consistent with firms using covenants to address
potential conflicts between stockholders and bondholders over growth option exercise (Billett,
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King, and Mauer, 2007) or bondholder risk driven by strong shareholder control (Cremers, Nair,
and Wei, 2007).
In contrast, Chava, Kumar, and Warga (2010) note the role of managerial agency costs,
and emphasize the degree that these agency issues can mitigate the bondholder-shareholder
conflict, to the degree that managerial entrenchment can occasionally benefit bondholders at the
expense of shareholders. Their evidence is consistent with the important role of agency issues;
although entrenchment increases the use of covenants to control for inefficient investment, it is
negatively associated with covenants on dividend payouts and accepting takeover offers. Qi,
Roth, and Wald (2011) use international data to establish results similar to Chava et al. (2010);
firms in countries with stronger shareholder control may have more severe shareholder-
bondholder conflicts, and thus prefer to use more covenants.
There are other reasons that firms may wish to employ poison put covenants. For
instance, Hege and Hennessy (2010) contribute to the literature examining why firms may wish
to issue debt with poison puts. They present evidence that the use of poison put covenants,
among other strategies, help an incumbent capture more of the surplus in the event of an
acquisition. In summary, the aforementioned papers present evidence that the effect of
entrenchment on the use of poison puts is unclear.
3 Data and Results
3.1 Data and sample statistics
Our data is collected from a number of sources. In particular, we use Mergent FISD as
our primary source of data for poison puts. We complement this data with Compustat for
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financial and accounting data, Thomson for institutional ownership data, RiskMetrics for certain
corporate governance measures, and SDC for acquisition data.
Given the low frequency of poison put issues prior to the 1990s, we begin our sample in
1990 and continue to 2012. In Panel A of Table 1, we provide the distribution of poison puts by
the percentage of bond issues and firm-years (of firms that issue bonds and with matching
Compustat data). This table reflects the large frequency of poison puts among our sample firms,
whether by bond-issuance activity or by firm-year. Our results highlight the relative resurgence
in the use of poison puts. For example, although their popularity diminished in the late 1990s
(i.e., to 8.1% of issues in 1998 and 11.3% of issues in 1999), their use significantly rebounded in
the later part of the last decade – by 2012, 56.8% of bond issues had poison put covenants. In
unscaled terms, 2012 was a record year, with 239 poison put issues and 172 firm-years where at
least one poison put was present in a bond. This is consistent with the use and prevalence of
poison puts not being diminished, despite more vigilant corporate governance over that period
that weakened many other aspects of entrenchment. The prominence of poison puts despite the
more rigorous recent governance environment would be consistent with poison puts reflecting
bondholders’ contracting demands, as opposed to a means of managerial entrenchment.
Alternatively, it is also plausible that poison puts are one of the few mechanisms of entrenchment
for otherwise well-governed firms – potentially due to shareholders’ limited ability to vote on
these covenants, or due to less shareholder scrutiny.
In Panel B of Table 1, we continue examining the characteristics of the sample poison put
firms by evaluating their relative prominence by Fama-French 48 industry group. This table
highlights the significant heterogeneity among firms’ industries, and reflects the importance of
industry characteristics in determining whether a firm is inclined to issue a bond with a poison
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put. Not surprisingly, among firms that are in industries with already prominent anti-takeover
protections – such as banking firms and utilities, due partly to government regulation – issuance
of bonds with poison puts is rare; for example, only 9.5% of issues in the financial industry and
15.1% in the utility industry contain poison puts. In contrast, among firms in industries with less
apparent anti-takeover protections (such as healthcare firms, construction firms, and business
services firms), issues with poison puts account for the majority of bond issues and of sample
firm-years; for example, poison puts are present in 76.3% of sample healthcare firms’ issues. The
results in this table are consistent with firms issuing poison puts if they are relatively more
vulnerable to a hostile acquisition, and not issuing these types of bonds when consolidation in the
industry is less frequent.
In Panel C, we examine the prevalence of poison puts by credit ratings. This table
highlights the weaker credit quality of firms that issue poison puts. Whereas highly-rated firms
seldom issue bonds with poison puts, their use becomes very common among firms with poorer
credit quality. For example, of firms A-rated and higher, our sample contains 208 issues with
poison puts, out of 2,723 total issues; in contrast, firms rated BB+, BB, or BB- issued 476 bonds
with poison puts, out of 652 total issues. This finding potentially reflects some of the contracting
regularities among lower-rated firms, and the notion that these firms’ creditors value the poison
puts (and, similarly, that issuing poison puts is less damaging to shareholder value for these firms
than for more highly-rated firms).
In conclusion, our results indicate that poison puts are common in general, and remain
prevalent in current bond issues. Firms appear more likely to issue poison puts if they are in
industries commonly associated with acquisition activity, and are less likely if they have other
safeguards in place to protect themselves and their bondholders from potentially risk-shifting
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acquisitions. Additionally, poison puts’ concentration among low-rated and non-investment
grade firms is consistent with contracting-based explanations for their use, as opposed to
governance-based explanations, since governance is not thought to be reliably associated with
credit ratings.
In Figure 1 and Table 2, we evaluate the percentage of firms’ issues represented by
poison puts, compared to non-poison put bonds. This is especially relevant for us to understand
whether firms’ poison put issuance reflects a more significant change in firms’ behavior, as
opposed to the decision to issue a bond with a poison put being a one-time decision unrelated to
the firm’s other bond issues. In Figure 1, we show that firms appear to establish a policy decision
of always issuing bonds with poison puts (851 firms) or never issuing bonds with poison puts
(847 firms). In contrast, there are a smaller number of firms (344 firms) with some, but not all,
issues containing a poison put – for 112 of those firms, poison put issues account for between
40% and 60% of their bond issues.
To examine whether those firms issuing only certain bonds with poison puts experienced
a policy shift when they began issuing these types of bonds, we study their issuance activity in
Panel B of Table 2. In this Panel, we show that there are a large number of issues that occur prior
to the firm’s first poison put issue, and a smaller number of issues that occur following the firm’s
last poison put issue. In contrast, during the time between the first and last issues with poison
puts, 76.7% of firms’ issues included bonds with poison puts. This is consistent with the decision
to issue bonds with poison puts as one that is deliberate and reflective of a general decision by
the firm to increase its anti-takeover protections. Additionally, the relatively small number of
issues that occur following the “last” poison put issue in our sample is consistent both with
firms’ reluctance to reduce their takeover protections once those protections are already in place,
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as well as new bondholders’ reluctance to accept covenants less favorable than those of prior
bondholders. Finally, the issuing activity that we note in this table supports the subsequent use in
our paper of an indicator variable equal to one if the firm had issued bonds with poison puts in
the prior five years – in general, use of poison puts in bonds tend to reflect a policy shift in firms’
covenants, as opposed to being temporary events that are not repeated.
In Table 3, we evaluate the sample statistics of our firms, to compare firm-years and bond
issues with poison puts to those without poison puts. In Panel A, we evaluate the differences in
means and medians of firm-years with at least one poison-put issue to those without a poison-put
issue (all firm-years are in our Mergent sample, and thus include firms that issued at least one
bond, to make the comparisons similar). Our results suggest that firms issuing bonds with poison
puts tend to be smaller (median sales of $1.7 billion, compared to $4.9 billion for the control
sample), have a higher market-to-book (median of 1.4, compared to the control sample’s 1.2),
and have more leverage (37%, compared to the control sample’s 31%). The differences in means
and medians for these two groups’ values of sales, market-to-book, and leverage are statistically
significant. The differences in these characteristics are consistent with the notion that firms with
poison puts are more prone to information asymmetries, thus helping explain why they are more
likely to use poison puts: their greater levels of information asymmetries would naturally
increase the need for bondholders to receive contractual assurances of protection from a risk-
shifting or otherwise damaging takeover event.
We also study the presence of four important governance variables: institutional
ownership, an indicator variable for firms incorporated in Delaware, a dummy for firms with
poison pills, and an indicator variable for firms with classified boards. Poison-put firms have
significantly higher levels of institutional ownership (64%, compared to 59% for other firms).
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This is consistent with these firms having, if anything, stronger external monitors – again, an
explanation that is consistent with a governance structure complemented by contractual
protections for bondholders (given these firms’ information asymmetries), and inconsistent with
weak governance and/or managerial entrenchment leading to the issuance of poison puts. Firm-
years with poison puts are significantly less likely to be from firms incorporated in Delaware.
Given the increased exposure of Delaware firms to acquisitions (Daines, 2001) and evidence that
Delaware firms are not more or less likely to replace CEOs due to poor performance
(Jagannathan and Pritchard, 2013), this finding is not consistent with firms issuing poison puts
having weaker governance.
Interestingly, poison put firms are significantly less likely to have a poison pill – it is
present in 35% of those sample firms, compared to 45% among the control firms. This, too,
ought to be expected, as poison put firms’ investors have a need to protect themselves from
takeovers. Finally, we do not find any evidence that poison put firms are more likely to have
classified boards; the similar prevalence of classified boards across the two groups of firms is
again consistent with any weaker governance among poison put firms.
In Panel B of Table 3, we evaluate characteristics of issues with poison puts, compared to
other issues. Our results are consistent with these firms experiencing greater information
asymmetries – the treasury spread is significantly higher for issues with poison puts (a median
spread that is 83 basis points higher than issues that do not have poison puts) and maturity is
significantly shorter than non-poison put issues (mean maturity is 11.0 years for poison put
issues and 13.1 for other issues). The offering amount is not reliably different between the
samples – poison put issues exhibit a significantly smaller mean and a significantly larger
median, compared to other issues.
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The number of covenants in poison put issues is consistent with bondholders demanding
stronger contractual protections. The mean and median number of bondholder protective
covenants in the issues (excluding poison put covenants) is significantly larger for issues with
poison puts than those without. Similarly, the difference in mean and median is significantly
present in issuer restrictive covenants as well; the mean number of these covenants is 3.95
among issues with poison puts, compared to 2.40 among other issues. This evidence is consistent
with poison puts being reflective of bondholders’ desires for optimal contracting, in contrast to
them being reflective of managerial opportunism. Managers seeking to entrench themselves
would be particularly reluctant to issue bonds that have significantly higher amounts of
covenants (and especially issuer restrictive covenants).
3.2 Results
In Table 4, we confirm these results with regressions on the determinants of poison puts.
The dependent variable is equal to one if the issue has a poison put, and is zero otherwise. Our
regression results are consistent with our univariate analysis. In particular, we find that the
number of covenants is positively and significantly associated with the presence of poison puts.
We also find that treasury spreads are positively associated with the presence of poison puts.
Larger issues are positively associated with poison puts, consistent with the median of poison put
issues being larger than other issues and in contrast to the mean of poison put issues being
smaller. Shorter maturity is also positively and significantly associated with the presence of
poison puts. In short, these issue-specific variables are consistent with our univariate tests.
With the exception of market-to-book, the firm-specific variables are also consistent with
our univariate tests. Lower levels of sales (i.e., firm size) are associated with a greater likelihood
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of a poison put issue. Additionally, leverage is positively and significantly associated with the
presence of a poison put when controlling for year fixed effects, reflecting the distinct
contracting environment for firms at risk of financial distress. In contrast, market-to-book is
negatively associated with the presence of a poison put, suggesting that the firms with fewer
growth options are more likely to acquiesce to limiting their vulnerability to being taken over.
In Table 5, we continue from our earlier result by examining the characteristics
associated with a firm-year having a poison put issue, conditional on the firm issuing bonds in
that year. Similar to our results in Table 4, the likelihood of a firm-year experiencing the
issuance of at least one bond issue with a poison put is greater in firms that are smaller, firms
with more leverage, and firms with lower market-to-book. Our other variables are also as
expected, and are inconsistent with poison puts being driven by poorly governed firms. In
particular, we find that (1) institutional ownership is higher for these firms, reflecting stronger
external monitoring coinciding with the use of poison puts; (2) an inconsistent effect of being
incorporated in Delaware; (3) depending on the fixed-effects, poison pills are either
insignificantly associated or negatively associated with the firm’s propensity to issue bonds with
poison puts; and (4) the use of classified boards is not significantly associated with the use of
poison puts. In conclusion, we do not find any evidence that the issuance of bonds with poison
puts is driven by these firms having weaker governance.
One way to study how the use of poison puts corresponds with other aspects of the firms’
contracting environment is to test what bond covenants are associated with poison puts. In Panel
A of Table 6, we show the percentage of bonds with given covenants, conditional on them
having poison puts. In this table, we find that the use of poison puts corresponds with other,
related covenants – likely reflecting bondholders with legitimate concerns related to acquisitions
18
and risk shifting. For example, the covenants most frequently seen in bonds with poison puts
relate to consolidations/acquisitions, asset sales, and cross-acceleration. In Panel B of Table 6,
we examine corresponding statistics of the proportion of poison put covenants present in bonds
that have certain types of covenants. Again, our results are broadly consistent with poison puts
being associated with protecting bondholders from the types of events that would occur in
somewhat risky firms. For example, whereas poison puts would be common among bonds that
have ratings decline triggers and asset sale clauses, they are less sensitive where bondholders’
concerns are less clear. As an example, only 22.2% of bonds with defeasance covenants contain
poison puts.
We continue by examining how poison puts are associated with subsequent acquisition
activity in particular industries. In Panel A of Table 7, we compare acquisition activity of firms
with poison puts with those that do not have poison puts. Consistently, we find that firms with
poison puts are less inclined to be involved in acquisitions, either as acquirers or targets. For
example, an average of 15% of sample poison put firm-years experience a year as an acquirer,
compared to 21% for firms without poison puts. Similarly, 7% of firm-years where the firm
issued poison puts are acquisition targets, compared to 10% of other firm-years.10 This is
consistent with poison puts reflecting a desire by the firm to avoid being involved in acquisitions,
as opposed to it using poison puts opportunistically to aggressively acquire firms while being a
less likely target itself. Interestingly, we also find that industries less prone to acquisition activity
(either as acquirers or as targets) are also more likely to have firms with poison puts. In
particular, for poison put firms, the industry-average percentage of acquisitions that occur are 6%
10 Our results are very similar when omitting withdrawn deals.
19
of acquisitions and 3% of targets, values that are significantly lower than 8% of firm-years and
4% of targets for non-poison put firms.
Given the earlier results, we also examine how acquisitions of poison put targets compare
to other firm-years. Our results in Panel B of Table 7 present mixed evidence regarding potential
risk-shifting occurring at acquisitions in which the target has a poison put.11 First, these
transactions are not significantly more likely to be hostile. Although this is not particularly
surprising given the paucity of hostile transactions, fewer hostile transactions would suggest that
poison puts work to deflect hostile takeovers. The transaction value is significantly larger for
firms with poison puts, with a median value of $72 billion compared to $53 billion for other
sample firms; admittedly, this partly reflects our inclusion of typically smaller firms without
public debt issues in our sample of non-poison put targets. The median market-to-book of poison
put targets is not significantly different than targets without poison puts, although the mean value
is significantly less, at 1.58, compared to 1.93 for non-poison put firms. The market-to-book of
the acquiring firm is not significantly different across subsamples. This is not consistent with
risk-shifting occurring.
We find broadly similar results for other variables related to risk-shifting. In particular,
although leverage is significantly higher for firms with poison puts (for example, the median
book and market value of leverage for these firms is 40% and 35%, respectively), the leverage of
acquirers is lower than that of the targets – for example, the median market value of leverage for
these firms is 20%, compared to 19% for non-poison put targets. This difference is significant at
the 10% level, and the difference in mean values of leverage are insignificantly different between
11 Our sample size here is larger since we are also including non-Mergent firms in the sample as “non-poison put
targets.” Our results are robust to limiting both samples to firms that are in Mergent.
20
the two subsamples. Although the mean and median of the book value of leverage of acquirers of
poison put firms (32% and 30%, respectively) are significantly higher than the corresponding
values for non-poison put firms (23% and 21%, respectively), the differences are not as
surprising when considering that they are comparable to the differences in book leverage
between the target firms. Moreover, the acquiring firm’s leverage is consistently below that of
the target’s for poison put firms – something that is inconsistent with risk-shifting occurring.
Finally, we consider earnings volatility. We find that poison put firm targets have significantly
lower earnings volatility compared to non-poison put firm targets (i.e., a mean value of 3%
compared to 9%), as do their acquirers (i.e., a mean value of 2%, compared to 10%).
Additionally, among targets with poison puts, the earnings volatility of the acquirers is less than
that of the targets (i.e., 2% compared to 3%), whereas this is not the case with non-poison put
targets (i.e., 10% compared to 9%). If anything, risk-shifting in favor of poison put target
bondholders seems to be occurring. This is consistent with the types of firms that issue poison
puts being particularly aware of the potential damage associated with risk-shifting, and inclined
to protect their bondholders more than otherwise comparable firms not issuing poison puts.
In Table 8, we regress the recent issuance of poison put bonds against other firm and
industry-specific characteristics. Firms in industries that are more acquisition-intensive (based on
the acquisition activity in the prior year) are more likely to issue bonds with poison puts. In
economic significance, a one-standard deviation increase in the industry’s acquisition intensity as
targets (acquirers) is associated with a 14.5% (17.5%) increase in the likelihood of the firm
issuing poison puts. This is consistent with these firms endeavoring simply to be less involved in
acquisition activities, and their issuance of poison puts is likely driven by being in a
consolidating industry; it is inconsistent with the sample statistics, and reflects the effect of the
21
year and industry fixed-effects. Additionally, as before, leverage and institutional ownership are
both positive and significant, and firm size is negative and significant.
For our other variables, market-to-book is less significant than before, likely having much
of its effect subsumed by our variable for the intensity of consolidation in the industry-year.
Additionally, earnings volatility is insignificant, indicating that, when controlling for all other
factors, firms particularly concerned about risk-shifting occurring are not more likely to issue
poison puts.
In Table 9, we examine the risk-shifting hypothesis in more detail, and find no consistent
evidence of risk-shifting occurring. The aspects that we consider for risk-shifting are the
acquirer’s market-to-book, leverage, and earnings volatility. Model (5) for leverage and Model
(7) for earnings volatility are the only regressions where the coefficient associated with poison
puts is significant. In these regressions, we find that the leverage or earnings volatility of the
acquirer are slightly lower when the target has a poison put – in contrast to what would be
expected from risk-shifting. However, these results are not robust to including year fixed-effects.
4. Conclusion
In this study, we examine the prevalence and determinants of firms’ use of poison put
covenants. Given the potential for these covenants to entrench management, and their continued
popularity (particularly in certain industries), it is important to understand how they interact with
other governance mechanisms that firms face.
Our evidence is consistent with poison put covenants being reflective of efficient
contracting. We do not find evidence of firms that issue these covenants experiencing weaker
governance, and present evidence that poison puts are driven by risk-shifting concerns. We also
22
find that firms with poison puts are less likely to be involved in acquisitions as either acquirers or
targets, even though these firms are in industries experiencing consolidation. Our evidence is
consistent with poison puts being employed in a manner consistent with firms’ contracting
environments, although their effect on mergers would increase entrenchment as well.
The increased prominence of poison put covenants and potential scrutiny from regulators,
combined with the potential for poison puts to facilitate managerial entrenchment, shows the
importance of understanding their role. Our results provide an example of a corporate finance
decision that seems to be primarily driven by contracting considerations, as opposed to
governance failures.
23
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26
Figure 1: Histogram of percentage of firms’ issues containing poison puts
For each sample firm, this figure provides the proportion of the firm’s total issues that have
poison put covenants.
0
100
200
300
400
500
600
700
800
900 847
71
164
79
30
851
Axis
Tit
le
Percent of Issues with Poison Puts
Number of Firms
27
Table 1: Sample statistics
This table provides the number and proportion of poison put issues that occur, by various firm
characteristics. Panel A provides the distribution by firm-year, Panel B provides the distribution
by Fama-French 48 industry group, and Panel C provides the distribution by the bond’s S&P
credit rating (where available).
Panel A: Distribution by year
Year
Number of
Poison Put
Issues
Number of Poison
Put firm-years
% Poison Put
Issues
% Poison Put
Firm-Years
Number of
Issues in
Sample
Number
of Firms
in
Sample
1990 48 34 25.4% 27.9% 189 122
1991 55 47 15.3% 22.1% 359 213
1992 111 89 19.9% 27.6% 558 322
1993 176 151 25.4% 38.8% 692 389
1994 77 73 27.4% 38.2% 281 191
1995 40 65 10.7% 24.9% 375 261
1996 49 109 16.7% 38.8% 293 281
1997 31 70 9.9% 27.8% 312 252
1998 26 63 8.1% 23.8% 320 265
1999 27 46 11.3% 22.0% 239 209
2000 16 55 9.9% 33.1% 162 166
2001 23 66 8.5% 28.1% 271 235
2002 18 42 7.0% 19.9% 258 211
2003 31 109 11.5% 37.8% 270 288
2004 20 73 11.5% 39.9% 174 183
2005 16 29 9.1% 19.1% 175 152
2006 35 58 16.5% 32.4% 212 179
2007 155 135 56.2% 61.6% 276 219
2008 108 97 47.0% 58.4% 230 166
2009 195 175 50.1% 60.3% 389 290
2010 205 164 53.8% 61.2% 381 268
2011 176 128 50.4% 59.3% 349 216
2012 239 172 56.8% 57.3% 421 300
28
Panel B: Distribution by industry-group
Industry Group
Number of
Poison Put
Issues
Number of
Poison Put
firm-years
% Poison Put
Issues
% Poison Put
Firm-Years
Number of
Issues in
Sample
Number of
Firms in
Sample
Coal 9 10 100.0% 100.0% 9 10
Fabricated Products 3 6 100.0% 85.7% 3 7
Real Estate 11 12 91.7% 85.7% 12 14
Agriculture 9 7 90.0% 87.5% 10 8
Healthcare 58 67 76.3% 77.9% 76 86
Non-Metallic and Industrial Metal Mining 22 15 73.3% 68.2% 30 22
Measuring and Control Equipment 30 24 68.2% 64.9% 44 37
Construction 74 81 66.7% 73.6% 111 110
Precious Metals 8 8 66.7% 50.0% 12 16
Electrical Equipment 23 17 53.5% 53.1% 43 32
Rubber and Plastic Products 18 14 51.4% 51.9% 35 27
Steel Works Etc 35 39 50.0% 56.5% 70 69
Recreation 12 12 48.0% 57.1% 25 21
Apparel 9 9 45.0% 45.0% 20 20
Restaraunts, Hotels, Motels 38 43 43.7% 55.8% 87 77
Entertainment 29 40 43.3% 61.5% 67 65
Construction Materials 37 41 42.5% 56.9% 87 72
Wholesale 51 66 40.5% 50.0% 126 132
Business Services 69 114 40.1% 62.0% 172 184
Textiles 6 6 40.0% 46.2% 15 13
Communication 123 159 37.7% 56.4% 326 282
Business Supplies 69 48 36.3% 37.2% 190 129
Retail 176 150 35.7% 48.9% 493 307
Petroleum and Natural Gas 163 179 34.8% 48.8% 468 367
Tobacco Products 16 7 34.8% 38.9% 46 18
Electronic Equipment 45 95 34.6% 63.3% 130 150
Chemicals 81 58 34.5% 37.4% 235 155
Almost Nothing 8 13 33.3% 50.0% 24 26
Personal Services 6 12 33.3% 63.2% 18 19
Pharmaceutical Products 59 85 33.0% 51.8% 179 164
Food Products 65 51 32.8% 39.8% 198 128
Medical Equipment 21 33 31.3% 49.3% 67 67
Shipbuilding, Railroad Equipment 3 4 30.0% 57.1% 10 7
Consumer Goods 29 27 29.6% 36.0% 98 75
Machinery 40 47 28.8% 40.5% 139 116
Shipping Containers 11 11 28.2% 40.7% 39 27
Transportation 64 71 26.8% 40.8% 239 174
Computers 33 41 25.6% 45.6% 129 90
Aircraft 20 14 20.0% 26.9% 100 52
Printing and Publishing 11 9 19.0% 21.4% 58 42
Insurance 86 66 18.2% 17.1% 473 387
Candy & Soda 10 6 16.9% 17.6% 59 34
Automobiles and Trucks 14 20 15.7% 28.6% 89 70
Defense 3 4 13.0% 40.0% 23 10
Utilities 91 82 10.9% 15.1% 838 543
Beer & Liquor 11 9 10.5% 18.4% 105 49
Trading 39 70 8.8% 19.4% 443 361
Banking 29 48 3.2% 9.5% 916 507
29
Panel C: Distribution by credit rating
Credit rating
Number of
Poison Put
Issues
Number of Poison
Put firm-years
%
Poison
Put
Issues
%
Poison
Put
Firm-
Years
Number of
Issues in
Sample
Number of
Firms in
Sample
AAA - - 0.0% 0.0% 100 65
AA+ - 1 0.0% 4.0% 33 25
AA 10 7 3.3% 4.1% 299 169
AA- 12 8 3.0% 3.7% 399 216
A+ 76 45 10.3% 11.4% 737 396
A 110 83 9.5% 12.7% 1,155 654
A- 166 94 22.9% 20.5% 726 459
BBB+ 202 156 24.6% 28.3% 821 551
BBB 262 207 26.4% 29.6% 993 699
BBB- 225 199 37.6% 40.2% 599 495
BB+ 123 128 58.0% 63.7% 212 201
BB 179 194 71.0% 78.5% 252 247
BB- 174 235 92.6% 89.0% 188 264
B+ 173 220 94.0% 92.1% 184 239
B 59 94 93.7% 91.3% 63 103
B- 18 60 100.0% 89.6% 18 67
CCC+ 6 17 85.7% 89.5% 7 19
CCC 2 6 100.0% 66.7% 2 9
CCC- 1 1 50.0% 50.0% 2 2
CC 1 2 100.0% 66.7% 1 3
C - 1 0.0% 100.0% - 1
30
Table 2: Proportion of poison put issuance across sample
This table examines the proportion of issues that contain poison put covenants. Panel A, which
corresponds to Figure 1, provides the distribution by firm, for our sample period. Panel B
provides the distribution of issues for the subsample of firms that issued at least one bond with a
poison put, and for which less than 100% of its bonds contain poison puts.
Panel A: Proportion of sample firms’ issues containing poison put covenants
% of issues with a
poison put
Number of
firms
x=0% 847
0< x ≤5% 5
5%< x ≤10% 9
10< x ≤15% 14
15%< x ≤20% 24
20< x ≤25% 19
25%< x ≤30% 13
30< x ≤35% 33
35%< x ≤40% 21
40< x ≤45% 15
45%< x ≤50% 82
50< x ≤55% 3
55%< x ≤60% 12
60< x ≤65% 7
65%< x ≤70% 29
70< x ≤75% 28
75%< x ≤80% 8
80< x ≤85% 8
85%< x ≤90% 11
90< x ≤95% 3
95%< x <100% 0
x =100% 851
31
Panel B: Proportion of sample firms’ issues containing poison put covenants
Number of
issues
Number of
poison put
issues
% of
poison put
issues
% of poison
put issues
(dollar
weighted)
(1): Prior to first poison put
issue 917
(2): During the time that the
firm issues its first poison put
issue 1,595 1,224 76.7% 83.4%
(3): After final poison put
issue 389
32
Table 3: Differences in means and medians; issue and issuer characteristics
This table examines the differences in means and medians of firm-years where the firm issues at
least one issue with a poison put covenant in the firm-year (Panel A), or issue characteristics of
issues with poison put covenants (Panel B). Variables are defined as follows: Revenue (Firm’s
sales in that year, in millions), Market to Book (the market value of assets, scaled by the book
value of assets), Leverage (book value of total debt, scaled by the book value of assets),
Institutional Ownership (the proportion of the firm owned by institutional investors), Delaware
(an indicator variable equal to one if the firm is incorporated in Delaware, and zero otherwise),
Poison Pill (an indicator variable equal to one if the firm has a poison pill, and zero otherwise),
Classified Board (an indicator variable equal to one if the firm has a classified board, and zero
otherwise), Treasury Spread (the treasury spread of the bond issue, in basis points), Offering
Amount (the par value of the debt originally issued, in thousands), Maturity (the maturity of the
issue, in years), Number of BP Covenants (the number of bondholder protective covenants in the
same issue, excluding the poison put), and Number of IR Covenants (the number of issuer
restrictive covenants in the same issue). *, **, and *** denote significant differences in means
and medians at the 10%, 5%, and 1% levels respectively.
Panel A: Firm-year characteristics
Poison put firm-year Non-poison put firm-year
N Mean Median N Mean Median
Revenue 2,050 6,413 1,674 3,328 13,548*** 4,882***
Market to Book 2,050 1.67 1.37 3,328 1.48*** 1.19***
Leverage 2,050 0.41 0.37 3,328 0.31*** 0.31***
Institutional Ownership 2,050 0.55 0.64 3,328 0.54 0.59***
Delaware 831 0.42 0.0 1,259 0.46** 0.0**
Poison Pill 831 0.35 0.0 1,259 0.45*** 0.0***
Classified Board 831 0.51 1.0 1,259 0.52 1.0
Panel B: Issue characteristics
Poison put bond Non-poison put bond
N Mean Median N Mean Median
Treasury Spread 1,877 216.62 183.00 5,309 123.20*** 100.00***
Offering Amount 1,877 409,892 300,000 5,309 415,592 250,000***
Maturty 1,877 10.99 10.02 5,309 13.13*** 10.02
Number of BP Covenants 1,877 3.46 4.00 5,309 2.54*** 3.00***
Number of IR Covenants 1,877 3.95 3.00 5,309 2.40*** 3.00***
33
Table 4: Determinants of poison put covenants in an issue
This table presents the results of logistic regressions, in which the dependent variable is equal to
one if the issue contains a poison put covenant, and zero otherwise. Explanatory variables
include: LogBP (the natural log of one plus the number of bondholder protective covenants,
excluding poison puts), LogIR (the natural log of one plus the number of issuer restrictive
covenants), TreasurySpread (the treasury spread of the bond issue), LogOffAmount (the natural
log of one plus the offering amount), LogMaturity (the natural log of one plus the number of
days to maturity), LogRevenue (the natural log of one plus the firm’s sales), MarketToBook (the
market to book value of assets), Leverage (total debt scaled by total assets). Year and Fama-
French 12 industry fixed effects are included, where applicable. Firm-clustered standard errors
are provided in parentheses; *, **, and *** denote significant differences in means and medians
at the 10%, 5%, and 1% levels respectively.
(1) (2)
LogBP 0.477*** 0.240**
(4.570) (2.004)
LogIR 1.209*** 1.304***
(10.983) (11.086)
TreasurySpread 0.005*** 0.004***
(18.730) (9.441)
LogOffAmount 0.012*** 0.011***
(15.368) (12.617)
LogMaturity -0.148*** -0.098
(-2.793) (-1.539)
LogRevenue 0.001 -0.353***
(0.030) (-9.119)
MarketToBook -0.277*** -0.511***
(-4.854) (-6.919)
Leverage -0.154 1.266***
(-0.652) (4.581)
Constant -2.703*** 7.274***
(-2.982) (6.574)
Observations 7,186 7,186
Pseudo R2 30.58% 45.63%
Year fixed-effects No Yes
Industry fixed-effects Yes Yes
34
Table 5: Determinants of firm-year with at least one poison put covenant issued
This table presents the results of logistic regressions, in which the dependent variable is equal to
one if the firm-year is associated with the issuance of a bond with a poison put covenant, and
zero otherwise. Explanatory variables are as defined in Table 4, with the exception of:
InstitutionalOwn (the percentage of ownership by institutional investors), Delaware (an indicator
variable equal to one if the firm was incorporated in Delaware, and zero otherwise), PoisonPill
(an indicator variable equal to one if the firm had a poison pill, and zero otherwise),
ClassifiedBoard (an indicator variable equal to one if the firm had a classified board, and zero
otherwise). Year and Fama-French 12 industry fixed effects are included, where applicable.
Firm-clustered standard errors are provided in parentheses; *, **, and *** denote significant
differences in means and medians at the 10%, 5%, and 1% levels respectively.
(1) (2) (3) (4)
LogRevenue -0.367*** -0.622*** -0.452*** -0.772***
(-17.798) (-23.269) (-10.847) (-14.406)
MarketToBook -0.133*** -0.149*** -0.239*** -0.220**
(-2.839) (-2.744) (-2.980) (-2.274)
Leverage 1.822*** 2.396*** 1.047*** 1.857***
(9.113) (10.551) (2.912) (4.356)
InstitutionalOwn 0.321*** 0.671*** 2.057*** 1.071***
(2.857) (4.483) (8.886) (4.099)
Delaware -0.186* 0.523***
(-1.749) (3.644)
PoisonPill -0.835*** -0.149
(-7.270) (-1.065)
ClassifiedBoard -0.135 0.059
(-1.222) (0.456)
Constant 7.402*** 14.587*** 9.270*** 18.034***
(15.365) (21.981) (9.190) (13.507)
Observations 5,378 5,378 2,090 2,090
Pseudo R2 19.27% 32.54% 19.66% 36.69%
Year fixed-effects No Yes No Yes
Industry fixed-effects Yes Yes Yes Yes
35
Table 6: Covenants associated with poison puts
This table presents a description of the covenants associated with a poison put issue. In Panel A,
we provide the proportion of issues with poison puts that also have certain covenants. In Panel B,
we provide the prevalence of poison puts among issues that have certain covenants. The other
covenants are defined as follows: After_acquired_property_clause (property that is acquired after
the sale of current debt issues will be used in the current mortgage), Asset_sale_clause
(requirement that the issuer uses sale proceeds of certain assets to redeem bonds),
Consolidation_merger (restriction of a consolidation or merger with another entity),
Covenant_defeas_wo_tax_conseq (provides issuer the right to defease the indenture covenants
without tax consequences to the bondholder), Cross_acceleration (enables bondholders to
accelerate their debt, if any other debt of the firm has been accelerated due to default),
Cross_default (activates an act of default if any other debt of the firm experiences default),
Declining_net_worth (triggers certain bond provisions when the issuer’s net worth falls below a
certain level), Defeasance_wo_tax_conseq (provides issuer the right to defease the issue’s
monetary portion without tax consequences to the bondholder), Dividends_related_payments
(limits to some ratio the payments made to shareholders or other entities), Economic_cov_def
(provides issuer the right to defease indentures), Fixed_charge_coverage (requirement that issuer
has a minimum amount of earnings available for fixed charges), Funded_debt (restriction from
issuing additional “funded debt,” defined as any debt with a maturity of at least one year),
Indebtedness (restriction on incurring additional debt beyond a given dollar amount or as a
percentage of total capital), Investments (restriction on the issuer’s investment policy),
Legal_defeasance (provides the issuer the right to defease the security’s monetary portion);
Leverage_test (restricts the issuer’s total indebtedness), Liens (provides bondholders with unpaid
obligations the right to sell mortgaged property in the event of bankruptcy),
Maintenance_net_worth (requirement of issuer to maintain a minimum net worth),
Negative_pledge_covenant (requirement to secure current issue on a pari passu basis if the firm
issues secured debt), Net_earnings_test_issuance (requirement of certain profitability levels for
firm to issue additional debt), Rating_decline_trigger_put (triggers a bondholder put provision in
the event of a rating decline), Restricted_payments (restriction on issuer for making payments
not related to dividends to shareholders and other parties), Sale_assets (restriction on the issuer’s
ability to sell assets or on using the proceeds from asset sales), Sales_leaseback (restriction on
the type or amount used in sale-leaseback transactions), Senior_debt_issuance (restriction on the
amount of senior debt that may be issued), Stock_issuance_issuer (restriction on issuing common
stock), Stock_transfer_sale_disp (restriction on transferring or selling its own common stock),
Subordinated_debt_issuance (restriction on the issuance of subordinated or junior debt),
Transaction_affiliates (restriction on certain types of transactions with subsidiaries).
36
Panel A: Issues with poison puts – proportion of other covenants that are also present
Covenant Proportion
Consolidation_merger 92.8%
Sale_assets 92.6%
Cross_acceleration 80.7%
Defeasance_wo_tax_conseq 76.2%
Covenant_defeas_wo_tax_conseq 73.7%
Negative_pledge_covenant 70.3%
Sales_leaseback 54.7%
Indebtedness 34.7%
Restricted_payments 30.2%
Transaction_affiliates 30.2%
Fixed_charge_coverage 21.7%
Asset_sale_clause 14.9%
Dividends_related_payments 9.4%
Legal_defeasance 9.2%
Subordinated_debt_issuance 7.7%
Cross_default 7.0%
Economic_cov_def 6.1%
Rating_decline_trigger_put 6.1%
Liens 5.1%
Investments 4.3%
Stock_transfer_sale_disp 3.5%
Stock_issuance_issuer 3.0%
Maintenance_net_worth 2.6%
Declining_net_worth 1.8%
Funded_debt 1.5%
Senior_debt_issuance 0.5%
After_acquired_property_clause 0.2%
Net_earnings_test_issuance 0.1%
Leverage_test 0.0%
37
Panel B: Issues with certain covenants – proportion that also has poison puts
Covenant Proportion
Asset_sale_clause 99.3%
Rating_decline_trigger_put 99.1%
Restricted_payments 91.9%
Transaction_affiliates 90.0%
Investments 83.3%
Declining_net_worth 82.9%
Subordinated_debt_issuance 75.9%
Indebtedness 64.6%
Fixed_charge_coverage 58.2%
Stock_issuance_issuer 55.9%
Senior_debt_issuance 47.4%
Dividends_related_payments 43.6%
Cross_acceleration 37.9%
Maintenance_net_worth 33.3%
Funded_debt 33.3%
Liens 32.8%
Covenant_defeas_wo_tax_conseq 31.7%
Sales_leaseback 31.0%
Defeasance_wo_tax_conseq 30.7%
Sale_assets 29.1%
Consolidation_merger 29.1%
Negative_pledge_covenant 28.8%
Economic_cov_def 28.5%
Cross_default 24.0%
Legal_defeasance 22.2%
Stock_transfer_sale_disp 19.6%
After_acquired_property_clause 1.9%
Net_earnings_test_issuance 0.9%
Leverage_test 0.0%
38
Table 7: Differences in means and medians; poison puts and mergers
This table examines the differences in means and medians for firms that had recently issued
poison puts. In Panel A, we examine the propensity of firms to experience M&A-related
activities, depending on their past issuance of poison puts. In Panel B, we examine deal
characteristics where the target has a poison put. We distinguish a firm as having a poison put if
it issued at least one bond with a poison put within the prior five years; all other firms are
regarded as non-poison put firms. Our other variables in Panel A are: Acquirer (an indicator
variable equal to one if the firm was an acquirer in that firm-year, and zero otherwise),
Acquirer_year_mean (the average of firm-years in the industry where firms have Acquirer equal
to one), Target (an indicator variable equal to one if the firm was a target in that firm-year, and
zero otherwise), Target_year_mean (the average of firm-years in the industry where firms have
Target equal to one). In Panel B, our variables are: Hostile (an indicator variable equal to one if
the deal is hostile, and zero otherwise), Transaction Value (the deal’s transaction value), Market
to Book (the market to book value of assets of the acquirer or target, as specified in the table),
Book Leverage (the book value of leverage of the acquirer or target, as specified in the table),
Market Leverage (the market value of leverage of the acquirer or target, as specified in the table),
Earnings Volatility (the earnings volatility based on the prior five years of income before
extraordinary items scaled by the book value of assets, for the acquirer or target). *, **, and ***
denote significant differences in means and medians at the 10%, 5%, and 1% levels respectively.
Panel A: M&A activity for firms with and without poison put covenants
Poison put firm Non-poison put firm
N Mean Median N Mean Median
Acquirer 2,416 0.15 0.00 2,962 0.21*** 0.00***
Acquirer_year_mean 2,416 0.06 0.07 2,962 0.08*** 0.09***
Target 2,416 0.07 0.00 2,962 0.10*** 0.00***
Target_year_mean 2,416 0.03 0.03 2,962 0.04*** 0.04***
Panel B: Deal characteristics for firms with and without poison put covenants
Poison put targets Non-poison put targets
N Mean Median N Mean Median
Hostile 222 0.02 0.00 7,833 0.02 0.00
Transaction Value 193 183.91 72.00 6,961 141.60** 53.00***
Market to Book (target) 222 1.58 1.36 7,833 1.93*** 1.28
Market to Book (acquirer) 162 1.99 1.52 5,874 2.23 1.48
Book Leverage (target) 222 0.42 0.40 7,833 0.26*** 0.22***
Book Leverage (acquirer) 162 0.32 0.30 5,874 0.23*** 0.21***
Market Leverage (target) 222 0.39 0.35 7,833 0.29*** 0.24***
Market Leverage (acquirer) 162 0.26 0.20 5,874 0.25 0.19*
Earnings Volatility (target) 222 0.03 0.01 7,833 0.09*** 0.01*
Earnings Volatility (acquirer) 162 0.02 0.01 5,874 0.10*** 0.01
39
Table 8: Determinants of poison put issuance, merger characteristics
This table provides the results of logistic regressions on the firm having issued a bond with a
poison put covenant within the prior five years. All variables are as defined in Tables 4 and 7.
Firm-clustered standard errors are provided below in parentheses. *, **, and *** denote
significant differences in means and medians at the 10%, 5%, and 1% levels respectively.
(1) (2)
Target_year_mean 14.738***
(4.155)
Acquirer_year_mean 9.645***
(3.649)
LogRevenue -0.513*** -0.513***
(-11.220) (-11.218)
MarketToBook -0.118 -0.127*
(-1.635) (-1.765)
BookLeverage 2.157*** 2.140***
(6.196) (6.182)
EarningsVolatility -0.041 -0.057
(-0.072) (-0.101)
InstitutionalOwn 0.951*** 0.938***
(3.821) (3.794)
Constant 12.904*** 12.923***
(11.629) (11.637)
Observations 5,378 5,378
Pseudo R2 29.33% 29.32%
Year fixed-effects Yes Yes
Industry fixed-
effects Yes Yes
40
Table 9: Effects of poison puts on risk-shifting
This table provides the results of regressions for the risk-shifting hypothesis. The dependent
variables are of the acquirer’s (1) market to book value of assets; (2) market leverage; (3)
earnings volatility, as defined in Table 7. The independent variables are: PoisonPut (an indicator
variable equal to one if the firm issued a bond with a poison put covenant within the last five
years), LogRevenue (the natural log of one plus the target’s sales), MarketToBook (the target’s
market to book value of assets), BookLeverage (the target’s book value of leverage), and
EarningsVolatility (the target’s earnings volatility based on the prior five years of income before
extraordinary items, scaled by assets). Year and Fama-French 12 fixed-effects are provided
where applicable. Firm-clustered standard errors are provided below in parentheses. *, **, and
*** denote significant differences in means and medians at the 10%, 5%, and 1% levels
respectively.
Market to Book Market Leverage Market Leverage Earnings Volatility
(1) (2) (3) (4) (5) (6) (7) (8)
PoisonPut -0.131 -0.043 -0.031 -0.034 -0.039* -0.039 -0.009* -0.010
(-0.431) (-0.199) (-1.299) (-1.485) (-1.652) (-1.624) (-1.652) (-1.646)
LogRevenue 0.040 0.038 0.006 0.003 0.000 -0.003 -0.001 -0.002
(0.522) (0.352) (1.042) (0.400) (0.012) (-0.366) (-0.754) (-0.862)
MarketToBook 0.035 -0.123 -0.016 -0.012 0.017 0.015 -0.003 -0.004
(0.208) (-1.040) (-1.247) (-1.224) (1.109) (1.004) (-1.091) (-1.680)
BookLeverage -0.145 -0.299 0.228*** 0.221*** -0.007 -0.007
(-0.180) (-1.197) (3.632) (2.973) (-0.462) (-0.612)
MarketLeverage 0.284*** 0.247***
(4.753) (3.258)
EarningsVolatility 0.088 0.058
(0.877) (0.694)
Constant 0.941 0.664 0.020 0.121 0.094 0.219 0.040 0.048
(0.470) (0.244) (0.130) (0.697) (0.637) (1.190) (1.036) (0.910)
Observations 494 494 494 494 494 494 494 494
R2 5.27% 10.58% 21.64% 26.00% 23.11% 26.55% 3.43% 5.75%
Year fixed-effects No Yes No Yes No Yes No Yes
Industry fixed-effects Yes Yes Yes Yes Yes Yes Yes Yes