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Managers, Workers and Corporate Control

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Author Info
Pagano, Marco
Volpin, Paolo

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3649.

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Date of creation: Nov 2002
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Handle: RePEc:cpr:ceprdp:3649

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Related research
Keywords: corporate control; employment protection; ESOPs; private benefits; takeovers;

Other versions of this item:

Find related papers by JEL classification:
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
K22 - Law and Economics - - Regulation and Business Law - - - Corporation and Securities Law
K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Gary Gorton & Frank Schmid, 2000. "Class Struggle Inside the Firm: A Study of German Codetermination," Center for Financial Institutions Working Papers 00-36, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  2. Calvo, Guillermo A & Wellisz, Stanislaw, 1978. "Supervision, Loss of Control, and the Optimum Size of the Firm," Journal of Political Economy, University of Chicago Press, vol. 86(5), pages 943-52, October. [Downloadable!] (restricted)
  3. Sanford J. Grossman & Oliver D. Hart, 1980. "Takeover Bids, the Free-Rider Problem, and the Theory of the Corporation," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 42-64, Spring. [Downloadable!] (restricted)
  4. Alan J. Auerbach, 1988. "Corporate Takeovers: Causes and Consequences," NBER Books, National Bureau of Economic Research, Inc, number auer88-1.
  5. Marianne Bertrand & Sendhil Mullainathan, 1999. "Is There a Discretion in Wage Setting? A Test Using Takeover Legislation," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 535-554, Autumn. [Downloadable!] (restricted)
    Other versions:
  6. Mike Burkart & Denis Gromb & Fausto Panunzi, 1998. "Why Higher Takeover Premia Protect Minority Shareholders," Journal of Political Economy, University of Chicago Press, vol. 106(1), pages 172-204, February. [Downloadable!] (restricted)
  7. Sangsoo Park & Moon H. Song, 1995. "Employee Stock Ownership Plans, Firm Performance, and Monitoring by Outside Blockholders," Financial Management, Financial Management Association, vol. 24(4), Winter.
  8. Franks, Julian & Mayer, Colin, 1998. "Bank control, takeovers and corporate governance in Germany," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1385-1403, October. [Downloadable!] (restricted)
  9. Chaplinsky, Susan & Niehaus, Greg, 1994. " The Role of ESOPs in Takeover Contests," Journal of Finance, American Finance Association, vol. 49(4), pages 1451-70, September. [Downloadable!] (restricted)
  10. Gary Gorton & Frank Schmid, 2000. "Class Struggle Inside the Firm: A Study of German Codetermination," NBER Working Papers 7945, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Betton, Sandra & Eckbo, B Espen, 2000. "Toeholds, Bid Jumps, and Expected Payoffs in Takeovers," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 13(4), pages 841-82.
  12. Andrei Shleifer & Lawrence H. Summers, 1989. "Breach of Trust in Hostile Takeovers," NBER Working Papers 2342, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  13. Hellwig, Martin, 1998. "On the Economics and Politics of Corporate Finance and Corporate Control," Sonderforschungsbereich 504 Publications 98-43, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
  14. Brian E. Becker, 1995. "Union rents as a source of takeover gains among target shareholders," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 49(1), pages 3-19, October.
  15. Gordon, Lilli A. & Pound, John, 1990. "ESOPs and corporate control," Journal of Financial Economics, Elsevier, vol. 27(2), pages 525-555, October. [Downloadable!] (restricted)
  16. Beatty, Anne, 1995. "The cash flow and informational effects of employee stock ownership plans," Journal of Financial Economics, Elsevier, vol. 38(2), pages 211-240, June. [Downloadable!] (restricted)
  17. Marianne Bertrand & Sendhil Mullainathan, 2003. "Enjoying the Quiet Life? Corporate Governance and Managerial Preferences," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 1043-1075, October. [Downloadable!] (restricted)
  18. Garvey, Gerald T & Gaston, Noel, 1997. "A Theory of the Optimal Cost Barrier to Corporate Takeovers," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 657-75, August.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Chilosi, Alberto & Damiani, Mirella, 2007. "Stakeholders vs. shareholders in corporate governance," MPRA Paper 2334, University Library of Munich, Germany. [Downloadable!]
  2. Hirukawa, Masayuki & Ueda, Masako, 2008. "Venture Capital and Industrial ''Innovation''," CEPR Discussion Papers 7089, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Marko Simoneti & Aleksandra Gregoric, 2004. "Managerial ownership and corporate performance in Slovenian post-privatisation period," European Journal of Comparative Economics, Cattaneo University (LIUC), vol. 1(2), pages 217-241, December. [Downloadable!]
  4. Giovanni Cespa & Giacinta Cestone, 2007. "Corporate Social Responsibility and Managerial Entrenchment," CSEF Working Papers 173, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
  5. Marco Pagano & Paolo F. Volpin, 2005. "The Political Economy of Corporate Governance," American Economic Review, American Economic Association, vol. 95(4), pages 1005-1030, September. [Downloadable!]
    Other versions:
  6. Eduard Alonso-Paulí, 2007. "Contracting with a quiet life manager," Working Papers 07.19, Universidad Pablo de Olavide, Department of Economics. [Downloadable!]
  7. Olga Lazareva & Andrei Rachinsky & Sergey Stepanov, 2007. "A Survey of Corporate Governance in Russia," Working Papers w0103, Center for Economic and Financial Research (CEFIR). [Downloadable!]
  8. Josep A. Tribó, 2005. "An analysis of the length of labour and financial contracts: a study for Spain," Applied Economics, Taylor and Francis Journals, vol. 37(8), pages 905-916, May. [Downloadable!] (restricted)
  9. Cronqvist, Henrik & Heyman, Fredrik & Nilsson, Mattias & Svaleryd, Helena & Vlachos, Jonas, 2006. "Do Entrenched Managers Pay Their Workers More?," Working Paper Series 2005-23, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
    Other versions:
  10. Claessens, Stijn & Underhill, Geoffrey R D, 2005. "The Need for Institutional Changes in the Global Financial System: An Analytical Framework," CEPR Discussion Papers 4970, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Marco Pagano & Paolo Volpin, 2001. "The Political Economy of Finance," CSEF Working Papers 76, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
    Other versions:
  12. Simone Alfarano & Thomas Lux & Mishael Milakovic, 2008. "The Small Core of the German Corporate Board Network," Kiel Working Papers 1446, Kiel Institute for the World Economy. [Downloadable!]
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