Working Paper: CEPR ID: DP3649
Authors: Marco Pagano; Paolo Volpin
Abstract: If the private benefits of control are high and management owns a small equity stake, managers and workers are natural allies. Two forces are at play. First, managers can transform employees into a 'poison pill' through generous long-term labour contracts and thereby reduce the firm?s attractiveness to a raider. Second, employees act as 'white squires' for the incumbent managers: to protect their high wages, they resist hostile takeovers, by refusing to sell their shares to the raider or by lobbying against the takeover. The model is consistent with available empirical findings, and also yields new predictions.
Keywords: Corporate Control; Employment Protection; ESOPs; Private Benefits; Takeovers
JEL Codes: G34; K22; K42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Management's small equity stake and large private benefits of control (G34) | High wages offered to employees (J31) |
| High wages offered to employees (J31) | Employees resist hostile takeovers (G34) |
| Management's small equity stake (G32) | Employees earn relatively high wages (J31) |
| Management's small equity stake (G32) | Employees are not closely monitored (J29) |
| Effectiveness of employment policies as a takeover deterrent (G34) | Legal protections afforded to employees (J71) |
| Successful takeover (G34) | New management cuts salaries (M12) |
| Successful takeover (G34) | New management increases monitoring of workers (M54) |
| New management cuts salaries (M12) | Rise in company's share price (G19) |
| Management's small stake (G34) | Employee stock ownership plans (ESOPs) serve as a defensive mechanism against takeovers (G34) |