Managers, Workers, and Corporate Control

Award Winner: 
Winner of the 2005 Egon Zehnder International Prize (Best paper on company boards and their role in corporate governance)

Managers, Workers, and Corporate Control

Paolo Volpin, Marco Pagano

Series number :

Serial Number: 

Date posted :

October 01 2002

Last revised :

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  • private benefits • 
  • employment protection • 
  • takeovers • 
  • ESOPs

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.