Managers, Workers, and Corporate Control


  • M. PAGANO,

  • P. F. VOLPIN

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    • Pagano is from the University of Naples Federico II, CSEF, and CEPR and Volpin is from the London Business School and CEPR. We thank Richard Green (the editor) and an anonymous referee who helped us to improve the paper considerably. We are also grateful to Alberto Bennardo, Uptal Bhattacharya, Francesco Giavazzi, Martin Hellwig, Michael Manove, Colin Mayer, Stewart Myers, Steven Ongena, Raghuram Rajan, Joshua Rauh, Luigi Zingales, and participants in seminars at Humboldt University, Indiana, LBS, MIT, Pompeu Fabra, Salerno, Tilburg, UBC, the 2001 Fifth SAET Conference (Ischia), the 2001 CIFRA-Wharton-TI Summer Theory Workshop (Amsterdam), the CEPR/CEMFI Workshop on Understanding Financial Architecture: Corporate Governance (Madrid), the 2nd Asian Corporate Governance Conference (Seoul), and the 2002 EFA meeting (Berlin). Our research has been supported by the Italian Ministry of Education, University, and Research (MIUR) and a JP Morgan Chase Research Fellowship. This paper is produced as part of a CEPR research network on Understanding Financial Architecture: Legal and Political Frameworks and Economic Efficiency, funded by the European Commission under the Human Potential Research Training Network program (contract no. HPRN-CT-2000-00064).


If management has high private benefits and a small equity stake, managers and workers are natural allies against takeover threats. Two forces are at play. First, managers can transform employees into a “shark repellent” through long-term labor contracts and thereby reduce the firm's attractiveness to raiders. Second, employees can 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 predicts that wages are inversely correlated with the managerial equity stake, and decline after takeovers.