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Institute for Financial Research SIFR Research Report Series, Institute for Financial Research

No 47:
Do Entrenched Manager Pay Their Workers More?

Henrik Cronqvist (), Fredrik Heyman, Mattias Nilsson, Helena Svaleryd and Jonas Vlachos

Abstract: We present evidence on whether managerial entrenchment affects workers' pay, using a large panel dataset that matches public firms with detailed data on their subsidiaries and workers. We find that CEOs with a stronger grip on control pay their workers higher wages, but CEO ownership of cash flow rights mitigates such behavior. Unionized workers and executives are found to get a larger share of the higher pay. These findings do not seem to be driven by productivity differences or reverse causality, and are robust to a series of robustness checks. Our evidence is consistent with an agency model in which entrenched managers pay higher wages because they come with direct private benefits for the manager, such as lower-effort wage bargaining and better CEO-employee relations, and suggests more broadly an important link between the corporate governance of large public firms and labor market outcomes.

Keywords: Corporate governance; agency problems; private benefits; matched employer-employee data; wages; (follow links to similar papers)

JEL-Codes: G32; G34; J31; (follow links to similar papers)

47 pages, September 15, 2006

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