Anecdotal evidence suggests that uncontrolled managers let wages rise above competitive levels.
Testing this popular perception has proven difficult, however, because independent variation in the
extent of managerial discretion is needed. In this paper, we use states’ passage of anti-takeover
legislation as a source of such independent variation. Passed in the 1980s, these laws seriously
limited takeovers of ﬁrms incorporated in legislating states. Since many view hostile takeovers as
an important disciplining device, these laws potentially raised managerial discretion in affected
ﬁrms. If uncontrolled managers pay higher wages, we expect wages to rise following these laws.
Using ﬁrm-level data, we ﬁnd that relative to a control group, annual wages for ﬁrms incorporated
in states passing laws did indeed rise 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 political economy of the
laws or other sources of bias. Our results suggest that discretion signiﬁcantly affects wages. They
challenge standard theories of wage determination which ignore the role of managerial preferences.