M&As, Employee Costs and Labor Reallocation

Abstract

Mergers are associated with large and persistent earnings declines for incumbent employees. Using employer-employee administrative data linked with information on merger activity in Brazil, I find earnings declines are entirely driven by employees who exit target firms and explained by displacement in the short run and wage declines in the long run. Losses of firm-specific wage premiums account for the long-lasting adverse outcomes with employees transitioning to lower-paying, lower-quality firms. Reallocation costs are concentrated among low-skilled and "overplaced employees." I argue that rent extraction from employees in firms paying high premiums is a potential source of efficiency gains in mergers.

Keywords: M&As, Displacement, Labor Mobility, Employer Fixed Effects

JEL Classification: G34, J2, J3