Is There a Discretion in Wage Setting? A Test Using Takeover Legislation

Anecdotal evidence suggests that uncontrolled managers let wages rise above competitive levels. To test this belief, we examine the wage impact of antitakeover legislation passed throughout the 1980s in many states. Since many view hostile takeovers as an important disciplining device, these laws, by reducing takeover threats, potentially raised managerial discretion. If uncontrolled managers pay higher wages, we expect wages to rise following these laws. Using firm-level data, we find that these laws raised annual wages by 1% to 2%, or about $500 per year. The findings are robust to a battery of specification checks and do not appear to be contaminated by the political economy of the laws or other sources of bias. These results challenge standard theories of wage determination that ignore the role of managerial preferences