Abstract
This paper provides a formal model in which incumbent managers and workers sign a labour contract in the face of takeover pressures. We consider the possibilities: (i) workers can enhance their productivity by making an investment in specific human capital; (ii) a raider and workers will renegotiate the original contract after a takeover; and (iii) both the incumbent managers and the raider are concerned about their own reputations for being trustworthy in their contract arrangements. The main result shows that under certain conditions, a threat of takeovers forces the incumbent managers to select fewer investments in specific human capital even before a takeover although the incumbent managers have no incentive to behave opportunistically in the absence of takeover threats.
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