MANAGEMENT BUYOUTS, SUPERVISION AND EMPLOYEE DISCRETION
Date | 01 September 2007 |
DOI | http://doi.org/10.1111/j.1467-9485.2007.00424.x |
Published date | 01 September 2007 |
MANAGEMENT BUYOUTS,
SUPERVISION AND EMPLOYEE
DISCRETION
Kevin Amess
n
, Sarah Brown
nn
and Steve Thompson
n
Abstract
Using a matched sample of 1959 firms and 27,263 employees from the UK
Workplace Employee Relations Survey, we examine the effects of the manage-
ment buyout (MBO) organizational form on employee discretion and supervision.
Our findings suggest that for MBO firms, supervision is lower where there is a
higher proportion of craft and skilled service workers but is not lower for other
occupational groups. Using random effects ordered probit analysis, we find that
employees’ discretion over their work practices is higher in MBO firms; and that
the probability of higher discretion is greater where there is a higher proportion of
craft and skilled service employees. Our findings are consistent with: (i) MBOs
reducing hierarchical tiers and the number of supervisory staff, which increase
employees’ span of control and their discretion; and (ii) organizational change via
an MBO being ‘skill biased’ in favour of craft and skilled service employees.
I Intro ductio n
Management buyouts (MBOs) have become a common corporate restructuring
transaction in most western economies. In the United Kingdom alone, these
transactions averaged approximately d15 billion during the period 1994–2004.
1
The distinguishing features of an MBO are: first, that ownership of a business
unit passes to a new company in which the existing managers hold a major
equity stake; and second, to facilitate this transfer the new company takes on
debt, typically secured against its own physical assets or future cash flows. These
financial characteristics attenuate the agency problems associated with govern-
ance in the large modern firm (Thompson and Wright, 1995).
Unlike mergers, whose performance effects have been hotly contested in the
literature,
2
both share price studies (e.g. Kaplan, 1989; Lehn and Poulson, 1989;
n
Nottingham University Business School
nn
University of Sheffield
1
See Nottingham University’s Centre for Management Buy-Out Research at: www.cmbor.
org/index.phtml.
2
See O’Sullivan and O’Sullivan (2005) for a recent review of this literature.
Scottish Journal of Political Economy, Vol. 54, No. 4, September 2007
r2007 The Authors
Journal compilation r2007 Scottish Economic Society. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford, OX4 2DQ, UK and 350 Main St, Malden, MA, 02148, USA
447
Marais et al., 1989) and accounting data studies (e.g. Kaplan, 1989; Smith, 1990;
Smart and Waldfogel, 1994) have been broadly supportive of MBOs producing
performance gains.
3
These early studies focused on the US; nevertheless, more
recent UK evidence (e.g. Amess, 2002, 2003; Harris et al., 2005) has also suggested
that MBOs raise real economic performance and so improve resource utilization.
To date, the literature on the sources of MBO gains has largely focused on
improvements in operating performance (or productivity gains), wealth transfers
from pre-buyout stakeholders (e.g. bondholders, equity holders, taxpayers, and
employees), and reductions in deferrable expenditures e.g. capital, research and
development, and advertising expenditures (Thompson and Wright, 1995). In
addition, proponents of MBOs (e.g. Jensen, 1986, 1989) have argued the
superiority of the MBO organizational form and of the potential gains from
organizational changes as a consequence of adopting the MBO organizational
form. Despite such arguments, however, there is a paucity of evidence
concerning the employee effects of MBOs. A notable exception is Lichtenberg
and Siegel (1990), who hypothesize that one of the organizational changes
associated with the MBO is the substitution of compensation for supervision
with respect to production workers, based on an efficiency wage argument. Their
empirical findings suggest that the ratio of non-production workers to
production workers declines and production worker pay increases following
the MBO. Such findings suggest that the MBO organizational form may be
associated with an occupational structure characterized by relatively few
supervisory employees. The prediction of less supervisory employees within an
MBO firm suggests that MBOs may lead to delayering within organizations
resulting from fewer supervisory layers.
In this paper, we explore the hypothesis that MBO firms are expected to be
delayered organizations with fewer supervisors than non-MBO firms. We build
on Lichtenberg and Siegel’s (1990) analysis by examining the impact of MBOs
on employee supervision and employee discretion within the firm. In order to
explore the implications of MBOs for organizational structure, we analyse both
firm and employee level data in order to better appreciate the organizational
impact of MBOs. There is a distinct lack of studies in this area that exploit
employee level data. Such a lack of studies is perhaps not surprising given the
shortage of data sets with matched employee-firm level data that also includes
information relating to corporate control changes. We aim to redress this deficit
in the empirical literature on MBOs by analysing a matched employer–employee
data set to ascertain whether MBOs are associated with lower employee
supervision and higher employee discretion. We also explore whether there is a
‘skill bias’ in favour of certain occupations with respect to the type of employee
that is most likely to receive reduced supervision and increased discretion. The
paper is structured as follows. Section II presents the theoretical background to
our empirical analysis. Section III describes the data and outlines the
methodology. The results are presented in Section IV and conclusions are
drawn in Section V.
3
Thompson and Wright (1995) provide a review of this evidence.
K. AMESS, S. BROWN AND S. THOMPSON448
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