A THEORY OF THE OPTIMAL COST BARRIER TO CORPORATE TAKEOVERS

This paper characterizes financial and employment contracts in the pre sence of both worker moral hazard and the threat of opportunistic take overs. Firms in which worker efforts or specific investments are of gr eater importance are shown to exhibit a greater degree of deferred com pensation, supported by governance structures that allow managers to r esist hostile takeovers more vigorously. This effect is most pronounce d in firms where workers 'pay for their job' by accepting low wages ea rly in their careers. Firms in which large deferred payments cannot be offset by low starting wages will offer less resistance to a hostile bidder.