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.JEL classification: J31, J51, G32, G33, K31. * All authors are affiliated with UQ Business School, The University of Queensland. Corresponding author: k.tan@business.uq.edu.au. A previous version of the paper was circulated under the title "The Labor-Leverage Relation: New Firm-Level Evidence and a Quasi-Natural Experiment." We would like to thank Ashwini Agrawal, Murillo Campello, Alexander Ljungqvist, David Matsa, Ran Duchin, Tom Smith, Douglas Foster, William Martin, Terry Walter, Garry Twite, Peter Verhoeven, Jens Jackwerth, Mauricio Soto, Weiping Li, Richard Chung, seminar participants at the University of Queensland, the University of Adelaide, the University of Western Australia, Griffith University, and Xi'an Jiaotong University as well as discussants at the 2015 Asian Finance Association Annual Conference for their helpful comments and suggestions.
ACCEPTED MANUSCRIPT A C C E P T E D M A N U S C R I P TIn this paper, we exploit both a theoretical tension and a quasi-natural experimental design to uncover new and meaningful insights on the empirical relation between labor union power and corporate financial leverage. Our study is motivated from the view that, despite a decline in trade unionism in the United States over recent decades, labor unions still have potentially significant effects on corporate decision-making and firm outcomes. Notably, the capital structure literature has advanced two competing views regarding the relation between the bargaining power of labor and financial leverage: (a) leverage used as a bargaining device; (b) a labor vs. leverage crowding-out effect. While plausible arguments can be mounted in either of these directions, it becomes an empirical question whether/which one of these views dominates the other in contemporary market settings.The bargaining device view predicts a positive relation between unionization and financial leverage. Specifically, this perspective argues that financial leverage operates as a strategic tool, limiting the appropriation of rents by workers (see, e.g., Matsa (2010), Bronars and Deere (1991)). The general intuition behind these models is straight-forward. Unions and managers effectively bargain over the distribution of future cash flows. Before meeting at the bargaining table, the manager can lever up the firm and simultaneously return capital to shareholders (e.g., ...
