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Labor unions and corporate financial leverage: The bargaining device versus crowding-out hypotheses

Author

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  • Woods, Keegan
  • Tan, Kelvin Jui Keng
  • Faff, Robert
Abstract
We examine the empirical relation between labor unions and firm indebtedness in the contemporary United States. Our identification strategy exploits two negative exogenous shocks in union power and the threat of unionization. Further, in the context of panel regressions, we develop a novel firm-level proxy for the bargaining power of labor using collective bargaining information from mandatory IRS filings from 1999 to 2013. Across a battery of tests, we document evidence in favor of a crowding-out hypothesis — namely, a substitution effect between labor power and financial leverage. Notably, this effect is more pronounced in firms in labor-intensive and unionized industries.

Suggested Citation

  • Woods, Keegan & Tan, Kelvin Jui Keng & Faff, Robert, 2019. "Labor unions and corporate financial leverage: The bargaining device versus crowding-out hypotheses," Journal of Financial Intermediation, Elsevier, vol. 37(C), pages 28-44.
    • Handle: RePEc:eee:jfinin:v:37:y:2019:i:c:p:28-44
    DOI: 10.1016/j.jfi.2017.05.005
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    Cited by:

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    4. Zambrano-Monserrate, Manuel A., 2024. "Labor dynamics and unions: An empirical analysis through Okun's Law," Economic Analysis and Policy, Elsevier, vol. 82(C), pages 613-628.
    5. Rong, Yuen & Tian, Cunzhi & Li, Lifang & Zheng, Xinwei, 2020. "Labor hiring and stock return: A model and new evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 59(C).
    6. Ghaly, Mohamed & Kostakis, Alexandros & Stathopoulos, Konstantinos, 2021. "The (non-) effect of labor unionization on firm risk: Evidence from the options market," Journal of Corporate Finance, Elsevier, vol. 66(C).
    7. Li, Mingming & Chiang, Yao-Min & Liu, Haiming, 2023. "Employment protection and leverage adjustment speed: Evidence from China," Research in International Business and Finance, Elsevier, vol. 64(C).
    8. Vega-Gutierrez, Pedro Luis & López-Iturriaga, Félix J. & Rodriguez-Sanz, Juan Antonio, 2021. "Labour market conditions and the corporate financing decision: A European analysis," Research in International Business and Finance, Elsevier, vol. 58(C).
    9. Cao, Qingzi & Fang, Ming & Pan, Yuying, 2022. "Minority shareholders protection and corporate financial leverage: Evidence from a natural experiment in China," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    10. Di Giuli, Alberta & Matta, Rafael & Romec, Arthur, 2023. "Capital structure and reversible bargaining tools: Evidence from union-sponsored shareholder proposals," Journal of Banking & Finance, Elsevier, vol. 149(C).
    11. Ye, Qiaozhi & Huang, Ronghong & Tan, Kelvin Jui Keng, 2023. "Missing the boat: Regulatory approval delay and investment project outcomes," The British Accounting Review, Elsevier, vol. 55(6).

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    More about this item

    Keywords

    Labor unions; Capital structure; Natural experiment; Financial leverage;
    All these keywords.

    JEL classification:

    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K31 - Law and Economics - - Other Substantive Areas of Law - - - Labor Law

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