Managerial Horizon and Corporate Labor Policies: Evidence from Fixed-Term Boards∗

We examine the relationship between managerial incentives and firms’ human resources policies by combining Italian social security records with newly collected data on board terms. We exploit the fact that boards of listed companies are appointed every three years as a source of cyclical variation in the horizon of bord members. Our evidence shows that wages drop sharply as managers approach the end of their tenure, consistent with executives trying to cut labor expenses and, hence, maximize cash flow when they are up for re-appointment. Consistent with a simple theoretical framework, these effects are not present in firms where managers are entrenched, such as family-managed firms, and when executives have a long tenure. By leveraging from individual high frequency administrative data, we show that workers employed by listed companies are disproportionately more likely to be separated exactly 12 months before the election and the month following the appointment of a new board. We relate these findings with existing agency models and empirical evidence on managerial preferences. Preliminary Draft: Please do not cite or circulate without permission ∗Corresponding author: Raffaele Saggio, Industrial Relations Section, Princeton University; Email: rsaggio@princeton.edu. We would like to thank Patrick Kline, Alex Mas, Terry Moon, Alan Morrison, Marco Pagano, Annalisa Scognamiglio, Alexander Wagner and Owen Zidar for useful comments. The views expressed in this article are those of the authors and do not necessarily reflect the views of the Bank of Italy. All errors are our own.