Mergers and Managers: Manager-Specific Wage Premiums and Rent Extraction in M&As

Abstract

This paper shows that some managers systematically pay higher wages to rank-and-file workers and these managers are targets of M&As. We use a manager-firm-worker matched dataset covering the entire population of Denmark from 1995 to 2011, and develop a novel framework to identify manager fixed styles in wage-setting from both worker and manager movements across firms. We find that there is substantial heterogeneity among managers in wage-setting styles, and firms with high wage premiums due to generous managers are more likely to be acquired. Following acquisitions, the target firms replace their generous managers and reduce workers’ wages, which accounts for a large part of shareholder gains in M&As. These results suggest that the market for corporate control selects managers who pay low wages and leads to lower wage growth in the labor market.

JEL Classification: G34, G30, J31, M52, J50, D22