Is there 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 anti takeover 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 un controlled managers pay higher wages, we expect wages to rise following the se 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 politic al economy of the laws or other sources of bias, These results challenge st andard theories of wage determination that ignore the role of managerial pr eferences.