Labor Laws and Corporate Investment

Abstract

In the United States, the costs of unionized labor are higher in states without right-towork (RTW) laws. I show that unionized firms located in these states invest less. These firms have about 4 percentage point lower capital expenditures (normalized by net property, plant, and equipment) than other firms. I confirm these findings by examining a natural experiment created by the adoption of RTW laws in Oklahoma and examining union certification elections using regression discontinuity design.

Operating Leverage and Underinvestment

“…This finding is shared with recent empirical studies (Cho ; Marciukaityte ). These studies normally take advantage of labor market friction to capture operating leverage; thus, they are relatively immune to the endogeneity curse brought by regression exercises on corporate investments.…”

Institutional investors and mispricing of unionized firms

“…Our study also contributes to the literature on the impact of labor laws and regulations on firms and markets (e.g., Marciukaityte, 2019; Myers & Saretto, 2016; Naiker & Navissi, 2006). Our findings suggest that laws and regulations offering special protection to labor unions lead to complex problems that only a small percentage of investors identify and trade on.…”

“…Moreover, the poor stock performance of unionized firms in states without RTW laws persists. Unionized firms from states without RTW laws have lower stock returns and worse operating performance measures than other firms (Marciukaityte, 2018, 2019). These lower returns seem to be driven by underperformance rather than lower risk (Marciukaityte, 2018).…”

“…Unions interfere with changes that do not benefit them (e.g., Abraham & Medoff, 1984; Chen et al, 2011). Moreover, if there are any changes in unionized firms that significantly improve their performance, unions can increase their demands, transferring more wealth away from shareholders (e.g., Marciukaityte, 2019). Brav et al (2015) show that hedge fund activism leads to higher labor productivity without an increase in wages.…”