Enjoying the Quiet Life? –commentary

This paper uses a clever check for reverse causality.  The authors find that for firms whose incorporating state adopts anti-takeover laws in the preceding twelve months, wages rise and productivity falls.  The reverse causality story is that rising wages (perhaps due to union pressure) and falling productivity threaten firms in a certain state, and therefore make that state more likely to enact anti-takeover laws.  The authors’ story depends on causality in the right direction.

The paper’s main tests use a binary variable BC to indicate whether a firm’s incorporating state enacted anti-takeover laws in the prior 12 months.  The coefficients on BC in the several regressions are the paper’s main findings.

In the reverse-causality check, the authors replace BC with four dummy variables:

  • Before-1 for firms incorporated in states that had not yet passed legislation but would do so in the next 12 months
  • Before0 for firms incorporated in states that had passed legislation in the prior 12 months
  • After 1 for firms incorporated in states that had passed legislation between 12 and 24 months prior
  • After2+ for firms incorporated in states that had passed legislation two or more years previously

Significant coefficients on Before-1 would have suggested that legislation was passed in response to an already-changing business environment.

Before0 was the variable of primary interest.

Small and Insignificant coefficients on After 1 and After2+ would have suggested that the effects of legislation were short-lived and therefore economically much less interesting.

In this case, the coefficients on Before-1 were small and statistically insignificant, ruling out the reverse causality.  The coefficients on After 1 and After2+ were significant and even larger than the coefficients on Before0, strengthening support for the authors’ story since their reported effects of anti-takeover laws continued to grow in the longer term.

Enjoying the Quiet Life? Corporate Governance and Managerial Preferences

Bertrand, Marianne, and Sendhil Mullainathan, 2003, “Enjoying the Quiet Life?  Corporate Governance and Managerial Preferences,” The Journal of Political Economy 111 (5), 1043-1075.

Purpose:  This paper examines the effect of anti-takeover laws on a variety of firm behaviors.

Findings:  Following the passage of anti-takeover laws, blue-collar wages rise 1%, white-collar wages rise 4%, and plant creation and destruction both fall so that firm size does not significantly change.  Capital expenditures are unaffected.  Total factor productivity falls.   Return on capital falls by 1%.  Findings contradict stakeholder theory that proposes increased efficiency when workers are paid more.  Findings contradict “empire-building” theories of corporate governance that suggest unfettered managers opt to increase firm size.

Motivation:  The reduced-form agency problem is our assumption that managers desire to pursue their own goals, which may not align with shareholders’ best interests.  There are many theories—but no consensus—regarding what managers’ personal goals actually are.


  • Longitudinal Research Database details plant-level employment and wages and plant creation and destruction.
    • The LRD does not include data on workers’ age, education, or tenure.
  • Compustat includes firm-level financial data, and each firm’s state of incorporation.
  • The Census of Auxiliary Establishments has better data on white-collar workers than the LRD.
    • These data are limited to the firm level (matching to specific plants is not possible)
    • These data are not available in every year, so we cannot analyze the trend
  • Corporate governance and firm behavior are endogenous, but this is overcome by studying anti-takeover laws passed by several states at different times.  The laws weakened governance by limiting the threat of hostile takeover, but were not driven by specific characteristics of any firm.  Laws were also passed at different times, so many firms belong both to the treatment group and to the control group in different years.
  • Analysis of firm-level outcomes
    • Difference-in-differences using firms incorporated in states that recently passed anti-takeover laws as the treatment group
  • Analysis of plant-level outcomes
    • The laws passed affected all firms incorporated in the passing state, regardless of the actual plant location
    • Control for regional economic and political variation by considering plants located in the same regions, one incorporated in a passing state, and one incorporated in some other state
  • Check for reverse causality, whereby states with rising wage pressures are more likely to pass anti-takeover legislation.  We do not find significant evidence of this.

Conclusions:  Anti-takeover legislation does change firm behavior.  Managers pay blue-collar workers more and pay white-collar workers much more, thus transferring more benefits to stakeholders.  Contrary to stakeholder theory, this benefit to stakeholders does not create overall improvement, as firm efficiency declines.  Managers avoid either opening or closing plants, undermining the “empire-building” view of manager preferences.  Managers appear to prefer “the quiet life,” with less employee conflict and fewer hard decisions.