The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1743-9132.htm

Stock price crash risk and the SPCR and the

adoption of
adoption of poison pills: evidence poison pills

from Brazil
Yuri Gomes Paiva Azevedo and Lucas Allan Diniz Schwarz
School of Economics, Business Administration and Accounting at Ribeir~ao Preto,
University of S~ao Paulo, Ribeir~ao Preto, Brazil Received 17 February 2022
Revised 15 June 2022
Hellen Bomfim Gomes Accepted 21 June 2022

Department of Accounting and Actuarial Sciences,

Federal University of Pernambuco, Recife, Brazil, and
Marcelo Augusto Ambrozini
School of Economics, Business Administration and Accounting at Ribeir~ao Preto,
University of S~ao Paulo, Ribeir~ao Preto, Brazil

Abstract
Purpose – The purpose of this paper is to examine the effect of stock price crash risk on the adoption of
poison pills.
Design/methodology/approach – The authors estimate logit and probit regressions. Their sample includes
185 Brazilian public firms for the period 2010–2018. Following previous studies, the authors use the negative
skewness of firm-specific weekly returns and the down-to-up volatility of firm-specific weekly returns as
measures of firm’s stock price crash risk. As proxies of poison pills, the authors employ the “conventional”
poison pills in their baseline models and the “eternity” poison pills, which prevent the removal of poison pills
from bylaws, in additional models.
Findings – The authors find that stock price crash risk measures are not associated with poison pill adoption.
However, although stock price crash risk does not lead to poison pill adoption as a complementary corporate
governance mechanism that protects firms against hostile takeover attempts, further results show that
managers do not draw on stock price crash risk as a pretext to entrench themselves. Additional analyses also
highlight that CEO power seems to play a role in moderating the relationship between stock price crash risk
and eternity poison pill adoption.
Originality/value – The authors contribute to the literature on stock price crash risk, which calls for research
in international contexts to better understand the effect of stock price crash risk on country-specific
idiosyncratic features. The authors discuss a controversial anti-takeover mechanism that has been debated by
Brazilian policymakers.
Keywords Anti-takeover mechanisms, Crashes, Risk
Paper type Research paper

1. Introduction
We examine the effect of stock price crash risk on the adoption of poison pills. Our motivation
arises from prior research documenting that although several studies mainly focus on the
determinants of stock price crash risk, concentrated primarily on China and the United States,
very little research examines the consequences of stock price crash risk, especially in different
institutional contexts, such as emerging markets (Habib et al., 2018). Therefore, through this
study, we extend the literature by examining whether a higher crash-prone stock (i.e. higher
stock price crash risk levels) influences poison pill adoption by Brazilian public firms.

JEL Classification — G12; G30; G34.

International Journal of Managerial
The authors thank the 21st Brazilian Finance Meeting participants and two anonymous reviewers Finance
for their helpful comments and suggestions. The authors also thank CAPES for their financial support. © Emerald Publishing Limited
1743-9132
All remaining errors are the authorsʼ. DOI 10.1108/IJMF-02-2022-0077
IJMF Brazil offers a unique setting to carry out our investigation because public firms could also
adopt a specific type of poison pill (called “eternity” poison pills) that cannot be changed or
removed (Ambrozini et al., 2015), unlike “conventional” poison pills adopted by US firms,
which are usually valid for a period of 10 years (Schepker et al., 2018). Hence, instead of
preserving shareholders’ rights and interests, as conceptually designed in the US context,
poison pills appear to be adopted in the Brazilian context to perpetuate managers in their
positions (Maestri, 2011), distorting its original purpose.
We predict that stock price crash risk is positively associated with poison pill adoption based
on two main arguments. On the one hand, under the shareholder alignment mechanism view,
firms facing a higher likelihood of stock price crashes could adopt poison pills as a “self-defense”
mechanism against potential hostile takeovers that would protect shareholder interests and
maximize wealth. On the other hand, under the entrenchment mechanism view, managers could
use extreme market devaluations as an excuse to promote managerial entrenchment through the
adoption of poison pills under the pretext of protecting shareholders interests.
To test our prediction, we estimate logit and probit regressions. Our sample includes 185
Brazilian public firms for the period 2010–2018. Following prior studies (Al Mamun et al.,
2020; Jia, 2018; Kim et al., 2019a, 2019b), we use the negative skewness of firm-specific
weekly returns (NCSKEW) and the down-to-up volatility of firm-specific weekly returns
(DUVOL) to measure a firm’s stock price crash risk. As proxies for poison pills, we employ
the “conventional” poison pills (PP) in our baseline models. We use the eternity poison pills
(Eternity), which prevents the removal of poison pills from bylaws, in additional models.
We find that stock price crash risk measures (NCSKEW and DUVOL) are not associated
with poison pill adoption (PP), which leads to the rejection of our research hypothesis.
However, although stock price crash risk does not lead to poison pill adoption as a
complementary corporate governance mechanism that protects firms against hostile
takeover attempts, further results show that managers do not draw on stock price crash
risk as a pretext to entrench themselves, considering that more crash-prone companies do not
face a higher likelihood of adopting eternity poison pills (Eternity).
We further explore a potential moderating factor that could indirectly shape this
relationship, namely CEO power. Our additional analyses highlight that CEO power seems to
play a role in moderating the relationship between stock price crash risk and eternity poison
pill adoption, suggesting that powerful CEOs reduce the likelihood of adopting eternity
poison pills as a response to greater crash risk. This finding is consistent with the quiet life
view, i.e. the view that powerful CEOs tend to avoid adopting aggressive managerial
entrenchment mechanisms to evade increased monitoring levels, which may interrupt their
quiet lives. However, our results provide limited support for this notion since our results are
not consistent across all estimations.
Our contributions are threefold. First, we contribute to the literature on stock price crash
risk, which calls for research in international contexts to better understand the effect of stock
price crash risk on country-specific idiosyncratic features (Habib et al., 2018) such as the
eternity poison pills adopted by Brazilian public firms. In this vein, we show that managers
do not adopt eternity poison pills as an aggressive managerial entrenchment mechanism
when a firm faces a higher likelihood of stock price crashes, thereby benefiting investors
because of the documented negative outcomes of managerial entrenchment (Chakraborty
et al., 2014; Chang and Zhang, 2015; Garcia-Sanchez et al., 2020).
Second, we also contribute to the literature on poison pills because, to the best of our
knowledge, this is the first study to examine the effect of stock price crash risk on poison pill
adoption. Thus, we complement previous research (Al Dah et al., 2017; Arikawa and
Mitsusada, 2011; Azevedo et al., 2021; Bhargava et al., 2017; Bhojraj et al., 2017; Eldar and
Wittry, 2021; Harris and Madura, 2010; Heron and Lie, 2015), by examining whether stock
price crash risk influences the adoption of poison pills by Brazilian public companies.
 Third, this study has several practical implications. We shed light on the incentives that SPCR and the
lead to the adoption of pervasive mechanisms that are not in the best interest of shareholders adoption of
(i.e. eternity poison pills). Thus, considering that eternity poison pills are a controversial anti-
takeover mechanism that has been debated by Brazilian policymakers, our results could be
poison pills
useful for shareholders and stakeholders since, by identifying these incentives, boards can
adopt corporate governance strategies in order to avoid them.
The study closest to ours is Bhargava et al. (2017), who find that the passage of state anti-
takeover laws in the US reduces the stock price crash risk. However, we significantly differ
from Bhargava et al. (2017) in the following ways: (1) We shed light on consequences and not
determinants of stock price crash risk. (2) We explore a different setting because, unlike
Anglo-Saxon countries, Brazil is classified as a poor governance country, with weak legal
protection for investors (Crisostomo et al., 2020; Martins et al., 2017). In this context, firms
could adopt eternity poison pills making it practically impossible for shareholders to change
or remove this anti-takeover defense (Azevedo and Nakao, 2019). This allowed us to
empirically test the entrenchment hypothesis proposed by Bhargava et al. (2017) and,
consequently, expand previous evidence by examining if, in some circumstances, stock price
crash risk could be associated with an aggressive managerial entrenchment’ mechanism,
namely eternity poison pills. (3) We are primarily focused on the scrutiny of one specific anti-
takeover defense, instead of examining anti-takeover laws spanning varied mechanisms,
each one with different characteristics that do not always focus on benefiting shareholders,
such as golden parachutes, as discussed by Maskara and Miller (2018).
The remainder of this paper is organized as follows. In Section 2, we review the related
literature and develop our hypotheses. Section 3 describes the sample selection and research
design. Section 4 presents the main results. Finally, in Section 5, we conclude the paper.

2. Literature review
2.1 Poison pills
Poison pills are rights plans issued to existing shareholders to grant them benefits in hostile
takeover attempts (Mbanyele, 2021). Although their terms and conditions may vary
considerably, the main purpose of a poison pill is to force potential acquirers to negotiate with
the target company’s board to buy a block of shares. Therefore, if the board does not approve
a bid and the potential acquirer proceeds, the poison pill is triggered, causing actions that
make the hostile takeover financially unattractive (Gine et al., 2017).
The “flip-in” and “flip-over” are the most common types of poison pills adopted in the US
context (Sunder, 2013). The “flip-in” allows target shareholders to purchase additional shares at
a discount - thereby diluting the potential acquirer’s stake in the target company - while the
“flip-over” allows shareholders to purchase the acquirer’s shares after the mergers and
acquisitions (M&A) deal at a discount (Drobetz and Momtaz, 2020). However, our literature
review shows that poison pills adopted in the US context differ significantly from those adopted
in other countries, such as Japan and Brazil, in line with the view that corporate governance
mechanisms may vary across different countries (ElKelish, 2018; Griffin et al., 2017) [1].
The “prior warning” and the “trust-type rights plan” are the two main types of poison pills
used in Japan to protect shareholders against hostile takeovers. The “prior warning” type
defines a rule that must be followed by a potential acquirer pursuing a takeover of a target
firm and the breach of the rule by this party leads to the issuance of new shares reservation
rights. The “trust-type rights plan” involves the issuance of new shares reservation rights in
advance to a trust bank or special purpose corporation. If a takeover event occurs, these
rights are allocated to shareholders (Arikawa and Mitsusada, 2011; Hamao and Matos, 2018).
In Brazil, the “type A” and the “type B” are the two types of poison pills adopted by publicly-
traded companies. On the one hand, the poison pill “type A” refer to the inclusion of a mandatory
IJMF bid right in the bylaws that requires the potential acquirer to make a tender offer to acquire all
the outstanding voting shares when its stake reaches a certain threshold (commonly 20%–30%),
paying a premium, such as 150% of the current market price (Leal et al., 2015).
On the other hand, the poison pill “type B” is triggered when a shareholder who has
acquired a predetermined threshold of ownership wishes to purchase more shares. In this
situation, the shareholder has to communicate its intention to the investor relations manager
of the company and the manager of trading activity of the stock exchange to arrange a tender
offer to be made through an open auction in the exchange market, which promotes
competition between bidders, as other parties interested in acquiring the company’s control
can also participate (Gorga, 2009). Therefore, although there are differences between the
types of poison pills used across countries, conceptually, the adoption of this anti-takeover
device should aim to grant benefits to shareholders, increasing their bargaining power in the
event of hostile takeover attempts.
Beyond these differences across the types of poison pills, in the Brazilian setting, public
companies may include eternity clauses related to poison pills in their bylaws, namely
eternity poison pills, which makes amendments harder to pass. The eternity poison pills
predict that the shareholders who attempt to change or remove this anti-takeover defense
from the bylaw have to offer to purchase all of the shareholders’ voting shares in a tender
offer by paying a premium on these shares’ price. Therefore, eternity poison pill adoption
signals managerial entrenchment intentions, making it practically impossible for
shareholders to change or remove this anti-takeover defense (Azevedo and Nakao, 2019).
According to the Brazilian Securities and Exchange Commission (Comiss~ao de Valores
Mobiliarios) Interpretative Guidance No. 36/2009, eternity poison pills violate several
principles and rules of the Brazilian Corporate Law (Lei 6.404/76), such as the free exercise of
voting by shareholders. However, although the Brazilian Securities and Exchange
Commission discourages the use of eternity poison pills, several Brazilian public
companies adopt eternity poison pills due to the absence of a specific regulation,
considering that this guidance does not carry the force of law.
Previous research shows that eternity poison pills may be employed to perpetuate
managers in their positions (Maestri, 2011), allowing them to enjoy better benefits such as
higher levels of executive compensation (Azevedo and Nakao, 2019) and to reduce accounting
information quality (Azevedo et al., 2020). Nonetheless, there are no clear benefits of these
mechanisms for shareholders – neither theoretically nor anecdotally.
Several studies have examined the drivers of poison pill adoption (Al Dah et al., 2017;
Arikawa and Mitsusada, 2011; Azevedo et al., 2021; Bhojraj et al., 2017; Davis, 1991; Dowen
et al., 1994; Eldar and Wittry, 2021; O. Harris and Madura, 2010; Heron and Lie, 2006, 2015;
Loh, 1994; Mallette and Fowler, 1992). These drivers can be categorized into three main
groups: (1) corporate governance mechanisms, (2) accounting-based measures and (3) market-
based measures.
Previous research on corporate governance mechanisms shows that board interlocking
(Davis, 1991), CEO duality (Al Dah et al., 2017; Chen et al., 2021; Jebran et al., 2022), CEO tenure
(Arikawa and Mitsusada, 2011), executive compensation plans (Azevedo et al., 2021; Heron
and Lie, 2006), institutional ownership (Bhojraj et al., 2017; Davis, 1991; O. Harris and Madura,
2010) and the presence of staggered boards (Heron and Lie, 2015) are corporate governance
drivers that positively influence the adoption of poison pills, whereas board size (Azevedo
et al., 2021; Loh, 1994) and CEO/managerial ownership (Al Dah et al., 2017; Arikawa and
Mitsusada, 2011; Heron and Lie, 2006, 2015) influence negatively. However, previous findings
also diverge regarding the relationship between the adoption of poison pills and board
independence.
Bhojraj et al. (2017) show that board independence is positively associated to the adoption
of poison pills, supporting the view that good governance mechanisms complement the
takeover protections in place in influencing the long-term orientation, contrary to Al Dah et al. SPCR and the
(2017) findings that board independence is negatively associated to the adoption of poison adoption of
pills. Al Dah et al. (2017) argues that poison pills could lead to managerial entrenchment when
adopted with other anti-takeover devices.
poison pills
The second line of inquiry, grounded in accounting-based measures, shows that the
relationship between accounting-based measures and poison pill adoption is controversial.
Previous research shows that leverage and RD expenditures are positively associated with
the adoption of poison pills (Al Dah et al., 2017; Bhojraj et al., 2017; Dowen et al., 1994; Eldar
and Wittry, 2021), whereas firm performance, sales growth and excess cash are negatively
associated (Azevedo et al., 2021; Bhojraj et al., 2017; Heron and Lie, 2006). However, there is no
consensus on the relationship between poison pill adoption and some accounting-based
measures, such as total assets, as a proxy for firm size.
Loh (1994) verifies a greater likelihood of poison pill adoption by larger firms, consistent
with the view that larger firms may have more expertise concerning takeover attempts and
more resources at their disposal to research, draft and enact anti-takeover devices (Mallette
and Fowler, 1992). However, Al Dah et al. (2017), Azevedo et al. (2021) and Bhojraj et al. (2017)
show that poison pills are inversely related to firm size. Since taking over a large company is
expected to be a complex process involving high costs (Al Dah et al., 2017; Cyert et al., 2002), a
takeover attempt is less likely. Thus, the large size of a firm acts as a takeover deterrent.
In the third line of inquiry, Davis (1991) employs market value as an alternative proxy for
firm size and shows consistent results indicating that larger firm size decreases a firm’s risk
of takeover, thus lowering the incentive to adopt poison pills. Further results also show the
positive influence of market-to-book on the adoption of poison pills (Harris and Madura, 2010;
Heron and Lie, 2006), corroborating the view that firms with higher growth opportunities are
viewed as more attractive targets for takeovers (Cyert et al., 2002). Therefore, it is necessary
for these firms to adopt poison pills to be insulated from hostile takeover attempts.
Nevertheless, an interesting phenomenon that has gone unnoticed in previous research is
the effect of stock price crash risk on the adoption of poison pills. Thus, we fill this gap in the
literature by examining whether stock price crash risk influences the adoption of poison pills,
considering that abrupt declines in stock prices could lead firms to be more prone to hostile
takeover attempts.

2.2 Stock price crash risk

Stock price crash risk is a characteristic of returns’ distribution. Crash risk refers to the
probability of observing extremely negative returns on a given stock, even after controlling
for systemic risk, that is, the risk that affects the whole economy (Jia, 2018). Thus, stock price
crash risk is also treated by the previous literature as a specific firm crash risk (DeFond et al.,
2015), since stock price crash risk measures attempt to isolate the systematic component of
stock returns, such as crashes induced by economic downturns and other tail systematic
events, such as the COVID-19 pandemic.
Researchers have shown increasing interest in investigating the causal mechanisms that
would explain the greater probability of extremely negative returns to understand why some
stocks are more crash-prone than others. The literature on this subject has considerably
increased in recent years (Habib et al., 2018). A large portion of the recent literature on this topic
is based on the theoretical framework presented by Jin and Myers (2006), which is based on
agency problems and information asymmetry. Jin and Myers (2006) argues that information
asymmetry between management and stakeholders (outside the company) plays a crucial role
on stock price crash risk, through a mechanism based on the accumulation of bad news by the
management. Although Jin and Myers (2006) theoretical framework is the most adopted
framework by recent research on the topic, the first empirical study dedicated to understanding
this particular type of risk was published only in 2009 by Hutton et al. (2009).
IJMF Information asymmetry allows managers to hoard bad news. When bad news
accumulation reaches an extreme level and the cost of keeping it hidden becomes
excessively high, managers choose to make it public. This accumulated bad news disclosure
alters the perception of stakeholders about the company’s fundamentals, generating
distributions of returns with negative asymmetry (left tail of returns distribution). In other
words, accumulated bad news disclosure tends to generate large negative variations
(crashes) in stock prices (Hutton et al., 2009; Kothari et al., 2009).
Based on this theoretical framework, numerous studies have sought to understand why
some stocks are more crash-prone than others. Habib et al. (2018) segment these studies into
five categories: (1) studies that seek to relate disclosure (financial or non-financial disclosure)
and stock price crash risk; (2) studies that seek to explain crash risk through management
characteristics and incentives; (3) studies that explain crash risk through capital market
characteristics, e.g. investor sentiment; (4) studies that seek to understand the nexus between
crash risk and corporate governance and; (5) studies that analyze informal institutional
mechanisms roles on stock price crash risk. Based on this taxonomy, recent research has been
presented below.
Hutton et al. (2009) stands out in the first line of studies that focus on the relationship
between disclosure and stock price crash risk. It documents a positive relationship between
earnings management (estimated via accruals) and crash risk. Francis et al. (2016), on the
other hand, analyzed earnings management through real activities, also identifying a positive
relationship with future stock price crashes. Both studies are based on the idea that
management can use earnings management to hide bad news, as long as it is tolerable. Other
studies seek to explore, as possible causes of the stock price crash risk, the degree of
accounting conservatism (Kim and Zhang, 2016), the level of corporate social responsibility
disclosure (Dai et al., 2019; Kim et al., 2014; Wu and Hu, 2019) and the readability’ degree of
financial reports, such as (Kim et al., 2019a).
The second line of inquiry aims to understand the relationship between management
characteristics (primarily CEO characteristics) and stock price crash risk. Among the
analyzed characteristics, one can find CEO age (Andreou et al., 2017), management
compensation incentives, such as equity-based incentive packages (Kim et al., 2011), CEO
overconfidence (Kim et al., 2016; Lee et al., 2019), gender (Li and Zeng, 2019) and CEO power
(Al Mamun et al., 2020; Harper et al., 2020). There are also studies that focus on more general
management aspects, such as board diversity (Jebran et al., 2020; Kao et al., 2020; Li and Zeng,
2019) and degree of hierarchy (Jebran et al., 2020).
The third line of inquiry is mainly related to studies that investigate the relationship
between investor sentiment characteristics and the probability of firm-specific stock price
crashes. In this regard, recent studies include Fu et al. (2021), Yin and Tian (2017), Cui and
Zhang (2020) and Ruwei et al. (2019). In general, they identify a negative relationship between
investor sentiment and the likelihood of crashes. Notwithstanding, research in this line of
inquiry is not only related (and limited) to analyzing the consequences of investor sentiment
on crash risk, but also analyzing other aspects such as media impact on bad news hoarding
behavior, as shown by Zhu et al. (2017) and Li et al. (2019).
There is a thin line between the fourth line of inquiry and the other lines of inquiries
previously mentioned, since some studies navigate between two or more lines. However,
numerous studies seek to analyze the impacts of corporate governance on stock price crash
risk more directly (Andreou et al., 2016; Hu et al., 2020; Jeon, 2019; Liao and Ouyang, 2017).
Among the mechanisms addressed by the fifth line of inquiry (which seeks to analyze the
informal mechanisms associated with a higher stock price crash risk), there are not so
approached factors such as religion (Callen and Fang, 2015; Li and Cai, 2016), individualism
(An et al., 2018), gambling preferences (Ji et al., 2021) and the degree of confidence between
individuals in a society (Cao et al., 2016; Li et al., 2017).
 2.2.1 Hypothesis development. Whether and how stock price crash risk could impact the SPCR and the
adoption of poison pills is an open-ended question - unclear, ex ante. We hypothesize that adoption of
stock price crash risk is positively related to poison pill adoption mainly through two
different mechanisms. A higher crash risk indicates that a stock is more prone to crash,
poison pills
having a more left-skewed return distribution, than one with a smaller left tail (Callen and
Fang, 2015). Crashes, translated into extreme market devaluations, pose significant risk,
especially to companies with dispersed ownership, which have become potential targets for
hostile takeovers (Eldar and Wittry, 2021; Heron and Lie, 2015). Firms facing a higher
likelihood of stock price crashes could adopt poison pills as a “self-defense” mechanism
against these potential hostile takeovers, protecting shareholder interests and maximizing
wealth. We name this first mechanism as the shareholder alignment mechanism.
However, one could argue that managers could use extreme market devaluations as a way
to promote managerial entrenchment under the pretext of protecting shareholder interests.
Since entrenched managers are more protected from the market of corporate control than
those not entrenched (DeAngelo and Rice, 1983), these managers could destroy shareholder
wealth through decisions based on personal benefit rather than shareholder interests. We
refer to this mechanism as the entrenchment mechanism.
H1. Crash-prone stocks are associated with a greater likelihood of poison pill adoption.

3. Research design
3.1 Sample and data
We use a sample of Brazilian publicly-traded companies listed on B3 (Brasil Bolsa Balc~ao), the
main (and unique) Brazilian stock exchange. Following previous studies, we exclude financial
firms. Our final sample consists of 185 publicly-traded Brazilian companies for the period
2010–2018. International Financial Reporting Standards (IFRS) became effective in Brazil in
2010. Our data were obtained from four different sources. We used the data obtained from the
Thomson Reuters Eikon Database. Compensation and board data is sourced from Comiss~ao
de Valores Mobiliarios’ (CVM) fillings and forms (Formularios de Refer^encia). We combined
these data with hand-collected data on Poison Pill Adoption (see Table 1).

3.2 Identifying poison pills

For each firm, we obtained information on the adoption of poison pills by reading corporate
bylaws. Our main dependent variable, PP, is a binary variable that equals 1 if company i has
adopted a poison pill over a year t and 0 if it has not. Eternity is a binary variable which equals
1 if a company i has adopted an eternity poison pill over a year t and 0 if it has not. Unlike
traditional poison pills, eternity poison pills prevent the removal of poison pills from bylaws.

3.3 Measuring stock price crash risk

We employ two measures of ex-post firm-specific stock price crash risk: (1) conditional firm-
specific weekly return skewness (NCSKEW) and (2) the down-to-up volatility of firm-

Brazilian publicly-traded companies 412

(
) Financial institutions 78
(
) Missing data 149 Table 1.
Final sample 185 Final sample
IJMF specific weekly returns (DUVOL). To ensure that our two stock price crash risk measures
reflect only firm-specific factors, rather than general market conditions (e.g. economic
shocks such as the 2007–2008 liquidity crisis), these two measures are based on firm-
specific weekly returns.
To calculate our stock price crash risk measures, we first obtain the firm-specific residual
weekly returns from the following model, estimated for each firm in each year based on
Hutton et al. (2009). Hutton et al. (2009) regresses weekly stocks returns on the local and US
weekly market index returns. In our case, we regress firm-specific weekly stock returns on the
Bovespa Index (Ibovespa), an index that comprises 65 stocks and accounts for most of the
trading and market capitalization in the Brazilian stock market.
Ri;t ¼ β0 þ β1 RBR;t−2 þ β2 RBR;t−1 þ β3 RBR;t þ β4 RBR;tþ1 þ β5 RBR;tþ2 þ εi;t (1)

where Ri,t is the return on stock i in week t. RBR,t is the return on the Ibovespa Index in week t.
We employ leads and lags terms for the Ibovespa Index to allow for nonsynchronous trading
(Figlioli et al., 2017; Kim et al., 2011). The firm-specific weekly stock return (Wi,t) is calculated
as ln(1 þ «i,t), where «i,t is the residual obtained from Equation (1).
Our first crash risk measure is the skewness of the conditional firm-specific weekly
returns (NCSKEW). NCSKEW is calculated as the negative of the third central moment of the
firm-specific weekly returns over a year, normalized by the standard deviation of the firm-
specific weekly returns (sample variance) raised to the third power (Zhou and Huang, 2019).
Precisely, we calculate NCSKEW as
,
h 3 X
i  X 3=2 
NCSKEWi;t ¼ − nðn
1Þ 2 3
W i;t ðn
1Þðn
2Þ 2
W i;t (2)

where Wi,t is defined above and n is the number of weekly returns over a year t. As we employ
the absolute value, multiplying the construct by negative one, a higher NCSKEW value
indicates a higher stock price crash risk.
Our second crash risk measure is the down-to-up volatility of firm-specific weekly returns
(DUVOL). For each firm i in a given year t, the firm-specific weekly returns are classified into
two groups: “Down”, when the returns are below the annual average and “Up”, when the
return are above the annual average. We then separately calculate the standard deviation of
firm-specific weekly returns for each of these two groups (“Down” and “Up”). DUVOL is
calculated as the natural logarithm of the ratio between the standard deviation in “Down” to
the standard deviation of “Up”. Specifically:
( , )
X 2 X 2
DUVOLi;t ¼ log ðnb
1Þ W i;t ðna
1Þ W i;t (3)
Down Up

where nb and na represents the number of “Up” and “Down” weeks, respectively, over a year t.
A higher DUVOL indicates a higher stock price crash risk.

3.4 Empirical model and variable definitions

We investigated the relationship between stock price crash risk and poison pill adoption by
estimating logit/probit models. Our main empirical specification has the following form:
PPi;tþ1 ¼ α þ βCRASHi;t þ λ0 Control i;t þ εi;t (4)

where PP is a binary variable which indicates if a company i has adopted a poison pill over a
year t. CRASH is either NCSKEW or DUVOL, as detailed in 3.3.
 λ0 Control is the set of control variables for poison pill adoption, including: Ownership SPCR and the
Concentration, measured as the accumulated percentage of shares with voting rights held by adoption of
the largest shareholder compared to all shares with voting rights; Board Size, measured as the
number of members on the company board; Performance, measured as the ratio between net
poison pills
income and total equity; Executive Compensation, measured as the sum of fixed and variable
compensation and stock options received by managers; Leverage, measured as the ratio
between total debt and total assets; Growth Opportunities, measured as the ratio between
market value and book value of equity; Premium Listing, a binary variable that indicates the
premium listing level: Level 1, Level 2 or Novo Mercado [2]; CEO Gender, a binary variable
that indicates if the CEO is female; CEO Tenure, measured as the number of years as CEO of
the firm; and CEO educational background, based on three types of degrees: bachelor’s
(Bachelor CEO), master’s (Master CEO) and doctorates (Ph.D. CEO).
All financial variables were winsorized at the 1% level to reduce the impact of extreme
outliers in our sample. We employed both logit and probit models in our econometric
analyses. As the Akaike Information Criterion (AIC) shows that sometimes logit fits better
than probit and vice-versa, we decided to disclose the results for both models. We control for
industry and time fixed effects.

4. Results
4.1 Descriptive statistics
Table 2 reports the summary statistics. Panel A shows that poison pills are adopted by 26,4%
of the sample, whereas eternity poison pills are adopted by 10,6%. These levels are consistent
with those in prior literature (Azevedo et al., 2021; Azevedo and Nakao, 2019; Portulhak et al.,
2017) and indicate that the adoption of poison pills is increasing over time by Brazilian
publicly-traded firms given that only seven firms adopted poison pills in 2006 (Vieira et al.,
2009). Both stock price crash risk measures are similar in magnitude but diverge in terms of
signal. The mean value of DUVOL is 0.035, whereas the mean value of NCSKEW is
0.061,
which suggests that our sample is less crash-prone than previous studies (Andreou et al.,
2017). Opposite signals between crash risk measures are widely observed in prior literature
on stock price crash risk (Al Mamun et al., 2020; Jia, 2018; Kim et al., 2019a; 2019b).
In Panels B and C, we examine whether there are differences in stock price crash risk across
firms (i.e. firms that adopt or do not adopt poison pills) using the Mann–Whitney U test as an
alternative to the T-Test, since the Shapiro–Wilk test indicates that our variables are non-
normally distributed. We find no statistically significant differences in the observed stock price
crash risk between companies that adopted or did not adopt poison pills (p-values:
NCSKEW 5 0.756, DUVOL 5 0.447) or between companies that adopted or did not adopt
eternity poison pills (p-values: NCSKEW 5 0.469, DUVOL 5 0.276). Overall, these results
naively suggest that stock price crash risk levels do not differ significantly between these firms.
Appendix (Table A1) shows the Spearman correlation matrix for all the variables. As
expected, both the stock price crash risk measures (NCSKEW and DUVOL) are highly
correlated, with a ratio of 0.831. As expected, PP is positively correlated with NCSKEW and
DUVOL. However, although positive, these correlations are not statistically significant and
the coefficients are very low. A similar pattern was observed for Eternity, as non-significant
and very low coefficients indicate that there is almost no association between stock price
crash risk and poison pill measures.

4.2 Baseline results

We begin our empirical analysis by estimating the relationship between stock price crash risk
and poison pill adoption. Table 3 presents the estimation results for the logit and probit
models.
IJMF Panel A - summary statistics
N Average Std. Dev Min Max

PP 1,175 0.264 0.441 0 1

Eternity 1,175 0.106 0.308 0 1
NCSKEW 1,175
0.061 0.787
1.354 1.173
DUVOL 1,175 0.035 0.208
0.293 0.363
Listing Premium 1,175 0.640 0.480 0 1
Ownership Concentration 1,175 0.474 0.244 0.084 0.999
Board Size 1,175 7.446 3.132 3 18
Firm Size* 1,175 14.438 2.346 6.943 18.434
Performance 1,175 0.055 0.427
2.064 1.570
Compensation* 1,175 12.149 12.374 0.000 88.816
Leverage 1,175 0.663 0.430 0.112 3.089
Growth Opportunities 1,175 2.741 11.047
0.253 81.650
CEO Gender 1,175 0.086 0.280 0 1
CEO Tenure 1,175 2.590 1.016 1 5
Bachelor CEO 1,175 0.140 0.348 0 1
Master CEO 1,175 0.483 0.500 0 1
Ph.D. CEO 1,175 0.365 0.482 0 1

Panel B – Differences in CRASH between PP adopters and not adopters

Adopt poison pills Do not adopt poison pills p-value
Obs Percentage(%) Obs Percentage(%)

NCSKEW 310 26.38 865 73.62 0.756

DUVOL 310 26.38 865 73.62 0.447

Panel C – Differences in CRASH between eternity adopters and not adopters

Do not adopt eternity poison
Adopt eternity poison pills pills p-value
Obs Percentage(%) Obs Percentage(%)

NCSKEW 125 10.64 1,050 89.36 0.469

Table 2. DUVOL 125 10.64 1,050 89.36 0.276
Summary statistics Note(s): * values in natural logarithms

Across all columns (1–4), the stock price crash risk variables’ coefficients (NCSKEW and
DUVOL) are positive, but not significant. This finding suggests that stock price crash risk is
not a driver that leads to the adoption of mechanisms that protects firms from hostile
takeover attempts. It is noteworthy that, when facing a greater likelihood of crash risk, firms
tend to be more prone to hostile takeovers because of the non-significant influence of
NCSKEW and DUVOL on PP. Overall, the coefficients of the control variables are generally
consistent with those in prior studies.
4.2.1 Eternity poison pills and stock price crash risk. Are managers adopting aggressive
managerial entrenchment mechanisms in response to a greater likelihood of extreme devaluations?.
Brazilian companies may include eternity clauses related to poison pills in their bylaws, unlike in
the United States, where poison pills typically lasts 10 years at most (Schepker et al., 2018). An
“eternity poison pill” makes amendments difficult to pass, signaling managerial entrenchment
since shareholders are virtually hampered from promoting changes (or even removal) of poison
pills clauses. An “eternity poison pill” makes amendments difficult to pass, signaling managerial
entrenchment since shareholders are virtually hampered from promoting changes in poison pill
clauses (or even their removal). Prior evidence suggests that eternity poison pills may be used to
 Dependent variable: PPi,tþ1
SPCR and the
Logit Probit Logit Probit adoption of
poison pills
NCSKEW 0.012 0.018
(0.111) (0.063)
DUVOL 0.195 0.152
(0.407) (0.235)
Premium Listing 2.148*** 1.177*** 2.148*** 1.179***
(0.243) (0.127) (0.242) (0.127)
Ownership
2.137***
1.186***
2.137***
1.185***
Concentration (0.400) (0.226) (0.400) (0.226)
Board Size
0.128***
0.067***
0.128***
0.068***
(0.040) (0.022) (0.040) (0.022)
Firm Size
0.152***
0.090***
0.151***
0.089***
(0.043) (0.025) (0.043) (0.025)
Performance
0.036
0.009
0.025
0.003
(0.185) (0.106) (0.186) (0.107)
Compensation 0.025*** 0.014*** 0.025*** 0.014***
(0.008) (0.004) (0.008) (0.004)
Leverage 0.003 0.003
0.002 0.001
(0.224) (0.124) (0.224) (0.124)
Growth Opportunities
0.004
0.003
0.004
0.003
(0.007) (0.004) (0.007) (0.004)
CEO Gender 0.634** 0.349** 0.635** 0.348**
(0.294) (0.168) (0.294) (0.168)
CEO Tenure
0.222**
0.111**
0.224**
0.112**
(0.088) (0.049) (0.088) (0.049)
Bachelor CEO
0.475
0.391
0.462
0.384
(0.850) (0.444) (0.852) (0.445)
Master CEO
0.515
0.427
0.503
0.420
(0.830) (0.431) (0.831) (0.432)
Ph.D. CEO
0.758
0.566
0.745
0.558
(0.834) (0.434) (0.836) (0.435)
Intercept 1.836 1.256** 1.810 1.232*
(1.157) (0.630) (1.159) (0.631)
Industry FE Yes Yes Yes Yes
Year FE Yes Yes Yes Yes
LR χ2 389.88*** 387.44*** 390.10*** 387.78***
AIC 1026.126 1028.564 1025.906 1028.224
Pseudo R2 0.288 0.286 0.288 0.286
Observations 1,175 1,175 1,175 1,175
Note(s): Standard errors (based on z-statistics) are reported in parentheses. *, ** and *** indicate statistical
significance at the 10, 5 and 1 percent level, respectively. PP is a binary variable which equals 1 if a company i
has adopted a poison pill over a year t and 0 if it has not, NCSKEW and DUVOL are detailed in 3.3. All control Table 3.
variables are defined in 3.4 Baseline regressions

perpetuate managers in their positions (Maestri, 2011), allowing them better benefits, such as
higher levels of executive compensation (Azevedo and Nakao, 2019) and reduced accounting
information quality (Azevedo et al., 2020).
Although it seems that managers do not adopt poison pills as a complementary protection
mechanism for shareholders against the higher likelihood of stock price crashes, as discussed in
Section 4.2.1, they could use the risk of extreme market devaluations as a pretext to adopt
eternity poison pills. If managers look for aggressive managerial entrenchment mechanisms in
response to a greater likelihood of stock crashes, we may observe a higher likelihood of eternity
poison pill adoption by more crash-prone companies. It is difficult to explain why managers
from a more crash-prone firm would adopt eternity poison pills, except for entrenchment.
IJMF Table 4 gives estimation results for our models where Eternity is the dependent variable.
Estimation results suggest that more crash-prone companies do not face a higher likelihood
of adopting eternity poison pills – the relationship between stock price crash risk measures
(NSCKEW and DUVOL) and Eternity was not statistically significant in all columns. Hence,
although Table 3 results suggest that managers are overlooking stock price crash risk (i.e. the
risk of extreme market devaluations) when taking decisions about the adoption of poison pills
as a shareholder protection mechanism, Table 4 results suggest that managers are not
drawing on stock price crash risk as a pretext to adopt anti-takeover mechanisms more
favorable to managerial entrenchment (eternity poison pills) than “conventional”

Dependent variable: Eternityi,tþ1

Logit Probit Logit Probit

NCSKEW 0.021 0.013

(0.158) (0.083)
DUVOL 0.288 0.147
(0.590) (0.307)
Premium Listing 1.646*** 0.746*** 1.644*** 0.746***
(0.353) (0.166) (0.353) (0.166)
Ownership
2.693***
1.325***
2.698***
1.324***
Concentration (0.639) (0.321) (0.639) (0.321)
Board Size
0.090
0.054*
0.090
0.054*
(0.060) (0.031) (0.060) (0.031)
Firm Size
0.283***
0.146***
0.281***
0.145***
(0.052) (0.029) (0.052) (0.029)
Performance
0.162
0.105
0.148
0.097
(0.274) (0.145) (0.275) (0.146)
Compensation 0.012 0.009 0.0124 0.009
(0.011) (0.006) (0.011) (0.006)
Leverage
0.007 0.003
0.013 0.001
(0.298) (0.154) (0.299) (0.154)
Growth Opportunities 0.010 0.005 0.010 0.005
(0.009) (0.005) (0.009) (0.005)
CEO Gender 0.419 0.244 0.419 0.242
(0.392) (0.206) (0.392) (0.206)
CEO Tenure
0.113
0.016
0.117
0.018
(0.132) (0.067) (0.132) (0.067)
Bachelor CEO
1.780*
0.972**
1.768*
0.968**
(0.946) (0.491) (0.949) (0.491)
Master CEO
1.610*
0.923**
1.594*
0.918**
(0.889) (0.466) (0.891) (0.467)
Ph.D. CEO
1.038
0.651
1.019
0.644
(0.895) (0.470) (0.898) (0.470)
Intercept 2.788* 1.488** 2.758* 1.472*
(
1.444) (0.758) (1.446) (0.759)
Industry FE Yes Yes Yes Yes
Year FE Yes Yes Yes Yes
LR χ 2
234.41*** 228.62*** 234.63*** 228.83***
AIC 608.224 614.017 608.004 613.810
Pseudo R2 0.299 0.291 0.299 0.292
Observations 1,175 1,175 1,175 1,175
Table 4. Note(s): Standard errors (based on z-statistics) are reported in parentheses. *, ** and *** indicate statistical
Stock price crash risk significance at the 10, 5 and 1 percent level, respectively. Eternity is a binary variable which equals 1 if a
and eternity poison company i has adopted an eternity poison pill over a year t and 0 if it has not, NCSKEW and DUVOL are
pills’ adoption detailed in 3.3. All control variables are defined in 3.4
mechanisms (like “conventional” poison pills). Managers are not taking stock price crash risk SPCR and the
into account when evaluating the adoption of poison pills, after all. adoption of
4.2.2 The moderating role of CEO power. Taking into account that we did not find a
significant relationship between stock price crash risk and poison pill adoption, we further
poison pills
explore a potential moderating factor that could indirectly shape that relationship: CEO
power. Several studies posit that the duality role is a driver of CEO power, i.e. CEOs gain
power when they are also the Chairman of the Board (Cragun et al., 2020), which increases
their capacity to determine boards’ decisions on firm strategies and policies (Amernic and
Craig, 2010; Muttakin et al., 2018). Although the role of CEO power in moderating the
relationship between stock price crash risk and the adoption of poison pills is unclear, we rely
on two competing mechanisms to theoretically explain why CEO power may moderate this
association: managerial entrenchment and quiet life.
On the one hand, under the managerial entrenchment view, powerful CEOs can exercise more
control over corporate policies, facilitating the adoption of anti-takeover provisions, such as
poison pills, to strengthen their job security and obtain private benefits (Lee et al., 2022). This
view is supported by previous evidence that CEOs are usually dismissed shortly after successful
takeovers (Harris, 1990; Mallette and Fowler, 1992). Therefore, CEOs facing a higher risk of
losing their jobs may be more prone to adopt anti-takeover defenses. In this sense, as firms facing
extreme devaluations are more prone to takeover attempts (Eldar and Wittry, 2021), we
conjecture that CEOs may use their power to protect their positions by adopting poison pills.
On the other hand, under the quiet life view, the adoption of anti-takeover mechanisms can
be costly for CEOs because it requires extra effort, which interrupts their quiet lives (Lee et al.,
2022). Previous literature supports this notion by documenting that entrenched managers
undermine shareholder wealth, reduce earnings quality and increase leverage levels. Because of
these negative outcomes, CEOs tend to face increased monitoring and scrutiny by market
participants when adopting anti-takeover mechanisms, especially when they are also
chairpersons of the board, as the power reflected through the dual role reflects weaker board
oversight and stronger managerial power in a single executive, fostering managerial
entrenchment (Aktas et al., 2019; Fama and Jensen, 1983). Thus, considering that CEOs who
secure a sufficient amount of power will prefer to enjoy a quiet life, avoiding the adoption of
anti-takeover mechanisms, we conjecture that powerful CEOs may avoid adopting poison pills
because of the notion that this adoption could be viewed by market participants as a signal of
severe entrenchment when combined with the duality role, potentially incurring a negative
market reaction and higher monitoring levels, which will disturb CEOs’ quiet lives.
The perspective that corporate governance mechanisms have substitutive effects also
provides further arguments to predict that firms with powerful CEOs will avoid adopting
anti-takeover mechanisms (Schepker and Oh, 2013). CEOs may perceive that the power
promoted by the duality role, as a corporate governance mechanism, allows them to insulate
firms from takeover threats (e.g. to call an Extraordinary General Meeting and influence the
board to approve a poison pill when the company becomes a takeover target). Finally, in
the Brazilian setting, powerful CEOs could also repeal eternity poison pill adoption given the
debate and scrutiny around this anti-takeover mechanism, such as the Brazilian Securities
and Exchange Commission (Comiss~ao de Valores Mobiliarios) Interpretative Guidance No. 36/
2009. Interpretative Guidance No. 36/2009 discourages the adoption of eternity poison pills
since it violates several principles and rules of the Brazilian Corporate Law (Lei 6.404/76),
such as the free exercise of voting by shareholders.
Following previous studies, we measure CEO power through CEO duality. CEO duality is a
situation wherein the CEO is also the chairman of the board (Brockmann et al., 2004; Lam and Lee,
2008; Tang, 2017; Teti et al., 2017). CEO duality is a mechanism that confers formal structural
power to a CEO, capturing the executive’s ability to influence policy and decision-making
through the board and senior management team (Baker et al., 2019; Lewellyn and Fainshmidt,
IJMF 2017). Although previous studies also use CEO pay slice as an alternative measure to capture
CEO power (Baker et al., 2019; Lee et al., 2022), we are unable to replicate this same proxy in the
Brazilian setting. The executive compensation amounts of Brazilian public companies are only
reported in groups (e.g. executive board, board of directors and fiscal committee), which does not
allow us to capture the compensation amounts received by CEOs individually.
Table 5 presents the results from estimating Eq. (4) with an interaction term between CEO
power and stock price crash risk measures (NCSKEW and DUVOL). The results suggest that
CEO power does not moderate the relationship between stock price crash risk and the adoption
of traditional poison pills, as noted by the non-significance of Dual x NCSKEW and Dual x
DUVOL. Table 6 presents the results from estimating Eq. (4) with Eternity as the dependent
variable and CEO power as an interaction term. In contrast, CEO power seems to play a relevant
role in moderating the relationship between stock price crash risk and the adoption of eternity
poison pills. Our results suggest that powerful CEOs seem to reduce the likelihood of adopting
eternity poison pills as a response to greater crash risk. The result holds for both interaction
terms (Dual x NCSKEW and Dual x DUVOL) across logit and probit estimations. Albeit
unreported, control results remain qualitatively similar for both estimations.
For the interaction terms between crash risk measures and CEO Power (NSCSKEW x
Duality and DUVOL x Duality), we find mixed results. Columns 1–2 of Table 6 indicate that
powerful CEOs tend to avoid adopting eternity poison pills, suggesting that they perceive that
the cost of adopting aggressive managerial entrenchment mechanisms when facing a higher
stock price crash risk outweighs the potential benefits. In other words, in line with the quiet life
view, powerful CEOs tend to avoid adopting aggressive managerial entrenchment mechanisms
to avoid increased monitoring levels, which may disrupt their quiet lives. However, it is
important to highlight that this finding is not consistent across all estimations since in Columns
3–4 of Table 6 the interaction term DUVOL x Duality is not statistically significant.

Dependent variable: PPi,tþ1

Logit Probit Logit Probit

NCSKEW 0.035 0.035

(0.119) (0.069)
DUVOL 0.229 0.185
(0.435) (0.252)
Duality 0.335 0.134 0.353 0.151
(0.271) (0.154) (0.275) (0.155)
Duality x NCSKEW
0.187
0.121
(0.303) (0.174)
Duality x DUVOL
0.247
0.210
(1.145) (0.657)
Intercept 1.860 1.271** 1.827 1.239**
(1.156) (0.629) (1.159) (0.631)
Industry FE Yes Yes Yes Yes
Year FE Yes Yes Yes Yes
LR χ 2
391.83*** 388.76*** 391.72*** 388.75***
AIC 1028.18 1031.244 1028.285 1031.261
Pseudo R2 0.289 0.287 0.289 0.287
Table 5. Observations 1,175 1,175 1,175 1,175
The moderating role of
CEO power on the Note(s): Standard errors (based on z-statistics) are reported in parentheses. *, ** and *** indicate statistical
relationship between significance at the 10, 5 and 1 percent level, respectively. PP is a binary variable which equals 1 if a company i
stock price crash risk has adopted a poison pill over a year t and 0 if it has not, NCSKEW and DUVOL are detailed in 3.3. Duality x
and poison pills’ NCSKEW is the interaction term between CEO duality and NCSKEW. Dual x DUVOL is the interaction term
adoption between CEO duality and DUVOL. Controls were omitted for brevity
 Dependent variable: Eternityi,tþ1
SPCR and the
Logit Probit Logit Probit adoption of
poison pills
NCSKEW 0.125 0.082
(0.173) (0.091)
DUVOL 0.592 0.349
(0.637) (0.335)
Duality 0.458 0.199 0.578 0.277
(0.382) (0.195) (0.378) (0.191)
Duality x NCSKEW
0.721*
0.411*
(0.429) (0.220)
Duality x DUVOL
2.124
1.191
(1.622) (0.831)
Constant 2.835** 1.550** 2.762* 1.510*
(1.439) (0.761) (1.444) (0.761)
Industry FE Yes Yes Yes Yes
Year FE Yes Yes Yes Yes
LR χ 2
238.96*** 233.78*** 238.05*** 232.57***
AIC 607.675 612.855 608.584 614.070
Pseudo R2 0.305 0.297 0.303 0.296
Observations 1,175 1,175 1,175 1,175 Table 6.
The moderating role of
Note(s): Standard errors (based on z-statistics) are reported in parentheses. *, ** and *** indicate statistical CEO power on the
significance at the 10, 5 and 1 percent level, respectively. Eternity is a binary variable which equals 1 if a relationship between
company i has adopted an eternity poison pill over a year t and 0 if it has not, NCSKEW and DUVOL are stock price crash risk
detailed in 3.3. Duality x NCSKEW is the interaction term between CEO duality and NCSKEW. Duality x and eternity poison
DUVOL is the interaction term between CEO duality and DUVOL. Controls were omitted for brevity pills’ adoption

5. Concluding remarks
This paper examines the effect of stock price crash risk on the adoption of poison pills. Using
a sample of 185 Brazilian public firms for 2010–2018, we find that stock price crash risk is not
a driver that leads to the adoption of poison pills. However, although unexpected, we show
that managers do not draw on stock price crash risk as a pretext to entrench themselves,
considering that more crash-prone companies do not face a higher likelihood of adopting a
particular Brazilian poison pill that signals aggressive managerial entrenchment intentions,
namely, the eternity poison pill.
Overall, our findings show that although stock price crash risk does not seem to be an
incentive for Brazilian firms to adopt aggressive managerial entrenchment mechanisms (i.e.
eternity poison pills), these firms do not fully protect themselves against hostile takeovers
because they do not adopt complementary corporate governance mechanisms such as
“conventional” poison pills, even if they have a higher crash-prone stock. Hence, it is relevant
that boards observe their stock’s characteristics (such as stock price crash risk) when making
decisions about adopting mechanisms to avoid hostile takeover attempts.
Further evidence highlights that although CEO power does not moderate the relationship
between stock price crash risk and the adoption of traditional poison pills, CEO power seems
to play a role in moderating the relationship between stock price crash risk and the adoption
of eternity poison pills, which is consistent with the quiet life view that powerful CEOs tend to
avoid adopting aggressive managerial entrenchment mechanisms to evade increased
monitoring levels. However, our results are not consistent across all estimations, providing
limited support for this notion.
Our findings contribute to the literature on stock price crash risk that calls for research in
international contexts to better understand the effect of stock price crash risk on country-specific
idiosyncratic features, such as the eternity poison pills adopted by Brazilian public firms.
Furthermore, our findings contribute to the literature on poison pills since, to the best of our
IJMF knowledge; this is the first study to examine the effect of stock price crash risk on the adoption of
poison pills. Our study also has practical implications, considering that we shed light on
incentives that lead to the adoption of pervasive mechanisms that are not in the best interest of
shareholders (i.e. eternity poison pills). Hence, considering that eternity poison pills are a
controversial anti-takeover mechanism that has been debated by Brazilian policymakers, our
results could be useful for shareholders and stakeholders since, identifying these incentives;
boards can adopt corporate governance strategies in order to avoid them.
However, our findings are subject to a number of limitations. First, we do not completely
address the reverse causality between stock price crash risk and the adoption of poison pills
variables through models that take endogeneity into account, such as simultaneous equations
models. Second, we do not explore additional moderating variables (e.g. board interlocking,
board independence, shareholder activism and CEO personality traits) that could play a role in
explaining the relationship between stock price crash risk and the adoption of poison pills.

Notes
1. See Malatesta and Walkling (1988) and Ryngaert (1988) for a revision of other types of poison pills,
such as back-end plans and voting plans.
2. By construction, these levels indicates different levels of corporate governance quality, from the
lower to higher: Level 1, Level 2 and Novo Mercado. These premium listings were created by
Ibovespa (S~ao Paulo Stock Exchange) to induce stricter corporate governance practices, requiring
more stringent shareholder protections (De Carvalho and Pennacchi, 2012). Azevedo et al. (2021)
found a relationship between those premium listing levels and poison pill adoption in the Brazilian
context over 2010–2017.

References
Aktas, N., Andreou, P.C., Karasamani, I. and Philip, D. (2019), “CEO duality, agency costs, and internal
capital allocation efficiency”, British Journal of Management, Vol. 30 No. 2, pp. 473-493.
Al Dah, B., Michael, A. and Dixon, R. (2017), “Antitakeover provisions and CEO monetary benefits:
revisiting the E-index”, Research in International Business and Finance, Vol. 42, pp. 992-1004.
Al Mamun, M., Balachandran, B. and Duong, H.N. (2020), “Powerful CEOs and stock price crash risk”,
Journal of Corporate Finance, Vol. 62, 101582.
Ambrozini, M.A., Pimenta, T.J. and Gaio, L.E. (2015), “As pilulas de veneno: clausulas em estatutos
sociais de empresas para dificultar o takeover hostil”, Revista de Administraç~ ao IMED, Vol. 5
No. 1, pp. 59-69.
Amernic, J.H. and Craig, R.J. (2010), “Accounting as a facilitator of extreme narcissism”, Journal of
Business Ethics, Vol. 96 No. 1, pp. 79-93.
An, Z., Chen, Z., Li, D. and Xing, L. (2018), “Individualism and stock price crash risk”, Journal of
International Business Studies, Vol. 49 No. 9, pp. 1208-1236.
Andreou, P.C., Antoniou, C., Horton, J. and Louca, C. (2016), “Corporate governance and firm-specific
stock price crashes”, European Financial Management, Vol. 22 No. 5, pp. 916-956.
Andreou, P.C., Louca, C. and Petrou, A.P. (2017), “CEO age and stock price crash risk”, Review of
Finance, Vol. 21 No. 3, pp. 1287-1325.
Arikawa, Y. and Mitsusada, Y. (2011), “The adoption of poison pills and managerial entrenchment:
evidence from Japan”, Japan and the World Economy, Vol. 23 No. 1, pp. 63-77.
Azevedo, Y.G.P. and Nakao, S.H. (2019), “The influence of poison pills on executive compensation”,
Advances in Scientific and Applied Accounting, Vol. 1 No. 3, pp. 039-061.
Azevedo, Y.G.P., Tavares, A.d. L., Mol, A.L.R. and de Freitas Neto, R.M. (2020), “Anti-takeover
protection and earnings management: the eternity poison pills effect”, Journal of Accounting,
Management and Governance, Vol. 23 No. 3, pp. 345-363.
Azevedo, Y.G.P., Gomes, H.B. and Nakao, S.H. (2021), “Poison pills e governança corporativa: um estudo SPCR and the
no mercado acionario brasileiro”, Revista de Contabilidade e Organizaç~oes, Vol. 15, p. e169831.
adoption of
Baker, T.A., Lopez, T.J., Reitenga, A.L. and Ruch, G.W. (2019), “The influence of CEO and CFO power
on accruals and real earnings management”, Review of Quantitative Finance and Accounting,
poison pills
Vol. 52 No. 1, pp. 325-345.
Bhargava, R., Faircloth, S. and Zeng, H. (2017), “Takeover protection and stock price crash risk:
evidence from state antitakeover laws”, Journal of Business Research, Vol. 70, pp. 177-184.
Bhojraj, S., Sengupta, P. and Zhang, S. (2017), “Takeover defenses: entrenchment and efficiency”,
Journal of Accounting and Economics, Vol. 63 No. 1, pp. 142-160.
Brockmann, E.N., Hoffman, J.J., Dawley, D.D. and Fornaciari, C.J. (2004), “The impact of CEO duality and
prestige on a bankrupt organization”, Journal of Managerial Issues, Vol. 16 No. 2, pp. 178-196.
Callen, J.L. and Fang, X. (2015), “Religion and stock price crash risk”, Journal of Financial and
Quantitative Analysis, Vol. 50 Nos 1-2, pp. 169-195.
Cao, C., Xia, C. and Chan, K.C. (2016), “Social trust and stock price crash risk: evidence from China”,
International Review of Economics and Finance, Vol. 46, pp. 148-165.
Chakraborty, A., Rzakhanov, Z. and Sheikh, S. (2014), “Antitakeover provisions, managerial
entrenchment and firm innovation”, Journal of Economics and Business, Vol. 72, pp. 30-43.
Chang, X. and Zhang, H.F. (2015), “Managerial entrenchment and firm value: a dynamic perspective”,
Journal of Financial and Quantitative Analysis, Vol. 50 No. 5, pp. 1083-1103.
Chen, S., Ye, Y. and Jebran, K. (2021), “Tax enforcement efforts and stock price crash risk: evidence
from China”, Journal of International Financial Management and Accounting, Vol. 33 No. 2, pp.
192-218.
Cragun, O.R., Olsen, K.J. and Wright, P.M. (2020), “Making CEO narcissism research great: a review
and meta-analysis of CEO narcissism”, Journal of Management, Vol. 46 No. 6, pp. 908-936.
Crisostomo, V.L., Brand~ao, I.d.F. and Lopez-Iturriaga, F.J. (2020), “Large shareholders’ power and the
quality of corporate governance: an analysis of brazilian firms”, Research in International
Business and Finance, Vol. 51, 101076.
Cui, H. and Zhang, Y. (2020), “Does investor sentiment affect stock price crash risk?”, Applied
Economics Letters, Vol. 27 No. 7, pp. 564-568.
Cyert, R.M., Kang, S.H. and Kumar, P. (2002), “Corporate governance, takeovers, and top-management
compensation: theory and evidence”, Management Science, Vol. 48 No. 4, pp. 453-469.
Dai, J., Lu, C. and Qi, J. (2019), “Corporate social responsibility disclosure and stock price crash risk:
evidence from China”, Sustainability, Vol. 11 No. 2, p. 448.
Davis, G.F. (1991), “Agents without principles? The spread of the poison pill through the
intercorporate network”, Administrative Science Quarterly, Vol. 36 No. 4, pp. 583-613.
De Carvalho, A.G. and Pennacchi, G.G. (2012), “Can a stock exchange improve corporate behavior?
Evidence from firms’ migration to premium listings in Brazil”, Journal of Corporate Finance,
Vol. 18 No. 4, pp. 883-903.
DeAngelo, H. and Rice, E.M. (1983), “Antitakeover charter amendments and stockholder wealth”,
Journal of Financial Economics, Vol. 11 Nos 1-4, pp. 329-359.
DeFond, M.L., Hung, M., Li, S. and Li, Y. (2015), “Does mandatory IFRS adoption affect crash risk?”,
The Accounting Review, Vol. 90 No. 1, pp. 265-299.
Dowen, R.J., Johnson, J.M. and Jensen, G.R. (1994), “Poison pills and corporate governance”, Applied
Financial Economics, Vol. 4 No. 4, pp. 305-313.
Drobetz, W. and Momtaz, P.P. (2020), “Antitakeover provisions and firm value: new evidence from the
M&A market”, Journal of Corporate Finance, Vol. 62, 101594.
Eldar, O. and Wittry, M.D. (2021), “Crisis poison pills”, The Review of Corporate Finance Studies,
Vol. 10 No. 1, pp. 204-251.
IJMF ElKelish, W.W. (2018), “Corporate governance risk and the agency problem”, Corporate Governance:
The International Journal of Business in Society, Vol. 18 No. 2, pp. 254-269.
Fama, E.F. and Jensen, M.C. (1983), “Agency problems and residual claims”, The Journal of Law and
Economics, Vol. 26 No. 2, pp. 327-349.
Figlioli, B., Lemes, S. and Lima, F.G. (2017), “IFRS, sincronicidade e crise financeira: a din^amica da
informaç~ao contabil para o mercado de capitais brasileiro”, Revista Contabilidade and Finanças,
Vol. 28 No. 75, pp. 326-343.
Francis, B., Hasan, I. and Li, L. (2016), “Abnormal real operations, real earnings management, and
subsequent crashes in stock prices”, Review of Quantitative Finance and Accounting, Vol. 46
No. 2, pp. 217-260.
Fu, J., Wu, X., Liu, Y. and Chen, R. (2021), “Firm-specific investor sentiment and stock price crash
risk”, Finance Research Letters, Vol. 38, pp. 101-442, 101442.
Garcia-Sanchez, I.M., Hussain, N., Khan, S.A. and Martinez-Ferrero, J. (2020), “Managerial
entrenchment, corporate social responsibility, and earnings management”, Corporate Social
Responsibility and Environmental Management, Vol. 27 No. 4, pp. 1818-1833.
Gine, M., Moussawi, R. and Sedunov, J. (2017), “Governance mechanisms and effective activism: evidence
from shareholder proposals on poison pills”, Journal of Empirical Finance, Vol. 43, pp. 185-202.
 (2009), “Changing the paradigm of stock ownership from concentrated towards dispersed
Gorga, E.
ownership: evidence from Brazil and consequences for emerging countries”, Northwestern
Journal of International Law and Business, Vol. 29, p. 439.
Griffin, D., Guedhami, O., Kwok, C.C., Li, K. and Shao, L. (2017), “National culture: the missing country-
level determinant of corporate governance”, Journal of International Business Studies, Vol. 48
No. 6, pp. 740-762.
Habib, A., Hasan, M.M. and Jiang, H. (2018), “Stock price crash risk: review of the empirical literature”,
Accounting and Finance, Vol. 58, pp. 211-251.
Hamao, Y. and Matos, P. (2018), “US-style investor activism in Japan: the first ten years?”, Journal of
the Japanese and International Economies, Vol. 48, pp. 29-54.
Harper, J., Johnson, G. and Sun, L. (2020), “Stock price crash risk and CEO power: firm-level analysis”,
Research in International Business and Finance, Vol. 51, 101094.
Harris, E.G. (1990), “Antitakeover measures, golden parachutes, and target firm shareholder welfare”,
The Rand Journal of Economics, Vol. 21 No. 4, pp. 614-625.
Harris, O. and Madura, J. (2010), “Cause and effects of poison pill adoptions by spinoff units”, Journal
of Economics and Business, Vol. 62 No. 4, pp. 307-330.
Heron, R.A. and Lie, E. (2006), “On the use of poison pills and defensive payouts by takeover targets”,
The Journal of Business, Vol. 79 No. 4, pp. 1783-1807.
Heron, R.A. and Lie, E. (2015), “The effect of poison pill adoptions and court rulings on firm
entrenchment”, Journal of Corporate Finance, Vol. 35, pp. 286-296.
Hu, J., Li, S., Taboada, A.G. and Zhang, F. (2020), “Corporate board reforms around the world and
stock price crash risk”, Journal of Corporate Finance, Vol. 62, 101557.
Hutton, A.P., Marcus, A.J. and Tehranian, H. (2009), “Opaque financial reports, r2, and crash risk”,
Journal of Financial Economics, Vol. 94 No. 1, pp. 67-86.
Jebran, K., Chen, S. and Zhang, R. (2020), “Board diversity and stock price crash risk”, Research in
International Business and Finance, Vol. 51, 101122.
Jebran, K., Chen, S. and Zhang, R. (2022), “Board social capital and stock price crash risk”, Review of
Quantitative Finance and Accounting, Vol. 58 No. 2, pp. 499-540.
Jeon, K. (2019), “Corporate governance and stock price crash risk”, Academy of Accounting and
Financial Studies Journal, Vol. 23 No. 4, pp. 1-13.
Ji, Q., Quan, X., Yin, H. and Yuan, Q. (2021), “Gambling preferences and stock price crash risk: SPCR and the
evidence from China”, Journal of Banking and Finance, Vol. 128, 106158.
adoption of
Jia, N. (2018), “Corporate innovation strategy and stock price crash risk”, Journal of Corporate Finance,
Vol. 53, pp. 155-173.
poison pills
Jin, L. and Myers, S.C. (2006), “R2 around the world: new theory and new tests”, Journal of Financial
Economics, Vol. 79 No. 2, pp. 257-292.
Kao, E.H., Huang, H.C., Fung, H.G. and Liu, X. (2020), “Co-opted directors, gender diversity, and crash
risk: evidence from China”, Review of Quantitative Finance and Accounting, Vol. 55 No. 2,
pp. 461-500.
Kim, J.B. and Zhang, L. (2016), “Accounting conservatism and stock price crash risk: firm-level
evidence”, Contemporary Accounting Research, Vol. 33 No. 1, pp. 412-441.
Kim, J.B., Li, Y. and Zhang, L. (2011), “CFOs versus CEOs: equity incentives and crashes”, Journal of
Financial Economics, Vol. 101 No. 3, pp. 713-730.
Kim, Y., Li, H. and Li, S. (2014), “Corporate social responsibility and stock price crash risk”, Journal of
Banking and Finance, Vol. 43, pp. 1-13.
Kim, J.B., Wang, Z. and Zhang, L. (2016), “CEO overconfidence and stock price crash risk”,
Contemporary Accounting Research, Vol. 33 No. 4, pp. 1720-1749.
Kim, C., Wang, K. and Zhang, L. (2019a), “Readability of 10-K reports and stock price crash risk”,
Contemporary Accounting Research, Vol. 36 No. 2, pp. 1184-1216.
Kim, J.B., Yeung, I. and Zhou, J. (2019b), “Stock price crash risk and internal control weakness:
presence vs disclosure effect”, Accounting and Finance, Vol. 59 No. 2, pp. 1197-1233.
Kothari, S.P., Shu, S. and Wysocki, P.D. (2009), “Do managers withhold bad news?”, Journal of
Accounting Research, Vol. 47 No. 1, pp. 241-276.
Lam, T.Y. and Lee, S.K. (2008), “CEO duality and firm performance: evidence from Hong Kong”,
Corporate Governance: The International Journal of Business in Society, Vol. 8 No. 3, pp. 299-316.
Leal, R.P., Carvalhal, A. and Iervolino, A. (2015), “One decade of evolution of corporate governance
practices in Brazil”, Brazilian Review of Finance, Vol. 13 No. 1, pp. 134-161.
Lee, E., Kim, C. and Lee, J. (2022), “How powerful CEOs adopt antitakeover provisions?”, Applied
Economics Letters, Vol. 29 No. 10, pp. 910-914.
Lee, Y.C., Lu, Y.C. and Wang, Y.C. (2019), “Corporate social irresponsibility, CEO overconfidence, and
stock price crash risk”, Applied Economics Letters, Vol. 26 No. 14, pp. 1143-1147.
Lewellyn, K.B. and Fainshmidt, S. (2017), “Effectiveness of CEO power bundles and discretion context:
unpacking the ‘fuzziness’ of the CEO duality puzzle”, Organization Studies, Vol. 38 No. 11,
pp. 1603-1624.
Li, W. and Cai, G. (2016), “Religion and stock price crash risk: evidence from China”, China Journal of
Accounting Research, Vol. 9 No. 3, pp. 235-250.
Li, Y. and Zeng, Y. (2019), “The impact of top executive gender on asset prices: evidence from stock
price crash risk”, Journal of Corporate Finance, Vol. 58, pp. 528-550.
Li, X., Wang, S.S. and Wang, X. (2017), “Trust and stock price crash risk: evidence from China”,
Journal of Banking and Finance, Vol. 76, pp. 74-91.
Li, Q., Wang, J. and Bao, L. (2019), “Media tone, bias, and stock price crash risk: evidence from China”,
Asia-Pacific Journal of Accounting and Economics, Vol. 29 No. 1, pp. 1-35.
Liao, Q. and Ouyang, B. (2017), “Organized labor, corporate governance, and stock price crash risk”,
Review of Accounting and Finance, Vol. 16 No. 4, pp. 424-443.
Loh, C. (1994), “The influence of outside directors on the adoption of poison pills”, Quarterly Journal of
Business and Economics, Vol. 33 No. 1, pp. 3-11.
Maestri, H.C. (2011), “Estudo comparado sobre a aplicabilidade das poison pills no direito brasileiro e
norte-americano”, Revista Direito Em Discurso, Vol. 4 No. 1, pp. 64-73.
IJMF Malatesta, P.H. and Walkling, R.A. (1988), “Poison pill securities: stockholder wealth, profitability, and
ownership structure”, Journal of Financial Economics, Vol. 20, pp. 347-376.
Mallette, P. and Fowler, K.L. (1992), “Effects of board composition and stock ownership on the
adoption of “poison pills””, Academy of Management Journal, Vol. 35 No. 5, pp. 1010-1035.
Martins, H.C., Schiehll, E. and Terra, P.R.S. (2017), “Country-level governance quality, ownership
concentration, and debt maturity: a comparative study of Brazil and Chile”, Corporate
Governance: An International Review, Vol. 25 No. 4, pp. 236-254.
Maskara, P.K. and Miller, L.S. (2018), “Do golden parachutes matter? Evidence from firms that
ultimately filed for bankruptcy”, The Quarterly Review of Economics and Finance, Vol. 67,
pp. 63-78.
Mbanyele, W. (2021), “Staggered boards, unequal voting rights, poison pills and innovation intensity:
new evidence from the asian markets”, International Review of Law and Economics, Vol. 65,
105970.
Muttakin, M.B., Khan, A. and Mihret, D.G. (2018), “The effect of board capital and ceo power on
corporate social responsibility disclosures”, Journal of Business Ethics, Vol. 150 No. 1, pp. 41-56.
Portulhak, H., Theiss, V., Kuhl, M.R. and Colauto, R.D. (2017), “Poison pills e gerenciamento de
resultados: estudo em companhias do Novo Mercado da BM&FBovespa”, Revista Universo
Contabil, Vol. 13 No. 2, pp. 25-42.
Ruwei, Z., Xiong, X. and Dehua, S. (2019), “Investor sentiment and stock price crash risk: evidence
from China”, Management Review, Vol. 31 No. 3, p. 50.
Ryngaert, M. (1988), “The effect of poison pill securities on shareholder wealth”, Journal of Financial
Economics, Vol. 20, pp. 377-417.
Schepker, D.J. and Oh, W.Y. (2013), “Complementary or substitutive effects? Corporate governance
mechanisms and poison pill repeal”, Journal of Management, Vol. 39 No. 7, pp. 1729-1759.
Schepker, D.J., Oh, W.Y. and Patel, P.C. (2018), “Interpreting equivocal signals: market reaction to
specific-purpose poison pill adoption”, Journal of Management, Vol. 44 No. 5, pp. 1953-1979.
Sunder, D. (2013), “The controversial “poison pill” takeover defense: how valid are the arguments in
support of it”, NMIMS Management Review, Vol. 23, pp. 47-66.
Tang, J. (2017), “CEO duality and firm performance: the moderating roles of other executives and
blockholding outside directors”, European Management Journal, Vol. 35 No. 3, pp. 362-372.
Teti, E., Dell’Acqua, A., Etro, L. and Volpe, M. (2017), “The impact of board independency, CEO
duality and CEO fixed compensation on M&A performance”, Corporate Governance, Vol. 17
No. 5, pp. 947-971.
Vieira, J., Martins, E. and Favero, L.P.L. (2009), “Poison pills no Brasil: um estudo exploratorio”,
Revista Contabilidade and Finanças, Vol. 20 No. 50, pp. 6-24.
Wu, C.M. and Hu, J.L. (2019), “Can CSR reduce stock price crash risk? Evidence from China’s energy
industry”, Energy Policy, Vol. 128, pp. 505-518.
Yin, Y. and Tian, R. (2017), “Investor sentiment, financial report quality and stock price crash risk: role
of short-sales constraints”, Emerging Markets Finance and Trade, Vol. 53 No. 3, pp. 493-510.
Zhou, L. and Huang, J. (2019), “Investor trading behaviour and stock price crash risk”, International
Journal of Finance and Economics, Vol. 24 No. 1, pp. 227-240.
Zhu, Y., Wu, Z., Zhang, H. and Yu, J. (2017), “Media sentiment, institutional investors and probability
of stock price crash: evidence from Chinese stock markets”, Accounting and Finance, Vol. 57
No. 5, pp. 1635-1670.

Corresponding author
Lucas Allan Diniz Schwarz can be contacted at: lucasschwarz@usp.br
 Appendix
Correlation Matrix

Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17)

(1) Poison Pill 1

(2) Eternity Poison Pill 0.576 1
(3) NCSKEW 0.009 0.021 1
(4) DUVOL 0.022 0.032 0.831 1
(5) Premium Listing 0.328 0.173 0.042 0.028 1
(6) Ownership Concentration −0.306 −0.193 0.019
0.010 −0.301 1
(7) Board Size
0.030
0.041 0.027 0.018 0.312
0.045 1
(8) Firm Size −0.089 −0.196 0.000
0.018 0.307
0.005 0.502 1
(9) Performance
0.027
0.018 −0.184 −0.271
0.045
0.009 0.036 0.024 1
(10) Compensation 0.238 0.146
0.008
0.016 0.384 −0.226 0.422 0.420 0.125 1
(11) Leverage
0.007
0.033 0.040 0.072 −0.057 0.063 0.027 0.107
0.056 0.009 1
(12) Growth Opportunities 0.083 0.084
0.056 −0.132 0.215 −0.146 0.234 0.222 0.053 0.316 0.089 1
(13) CEO Gender 0.071 0.062
0.022
0.024
0.010 0.024
0.032
0.010 0.052 0.017
0.026 0.006 1
(14) CEO Tenure
0.053
0.021
0.021 0.002
0.031 −0.079 0.017 0.030 0.002
0.010
0.032 −0.066
0.032 1
(15) Bachelor CEO
0.003
0.044 0.012 0.013 0.048 0.018 0.040 0.042 0.015 0.016 0.025
0.029
0.019 0.004 1
(16) Master CEO 0.089 0.014 0.025 0.022 0.154 −0.063 0.055 0.020
0.035 0.121 0.094 0.087 −0.060 0.122 −0.391 1
(17) Ph.D. CEO
0.101
0.004
0.033
0.038 −0.190 0.062 −0.078
0.046 0.027 −0.138 −0.100 −0.079 0.058 −0.149 −0.307 −0.734 1
Note(s): Bolded coefficients are statistically significant at a 5% level
SPCR and the
poison pills
adoption of

Correlation matrix
Table A1.