The Strategic Use of Corporate Cash Holdings in Collective Bargaining with Labor Unions
University of Arizona - Department of Finance
William F. Maxwell
SMU - Cox School
University of British Columbia (UBC) - Sauder School of Business
March 1, 2008
Journal of Financial Economics (JFE), Forthcoming
We provide evidence that firms in more unionized industries strategically hold less cash to gain bargaining advantages over labor unions and shelter corporate income from their demands. Specifically, we show that corporate cash holdings are negatively related with industry unionization rates. We also find that this relation is stronger for firms that are likely to place a higher value on gaining a bargaining advantage over unions and weaker for those firms in which lower cash holdings provides less credible evidence that a firm is unable to concede to union demands. Additionally, we document that unionized firms manage their cash holdings downward prior to labor negotiations and that increases in cash holdings raise the probability of a strike. Finally, we show that unionization decreases the market value of a dollar of cash holdings. Overall, our findings indicate that firms trade-off the benefits of corporate cash holdings with the costs resulting from a weaker bargaining position with labor.
Number of Pages in PDF File: 58
Keywords: Cash holdings, liquidity policy, hedging, labor unions
JEL Classification: G31, G32, J52
Date posted: April 27, 2007 ; Last revised: May 28, 2009
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