Download This PaperShadow Union in Local Labor Markets and Corporate Financing Policies
Journal of Corporate Finance, 2024 [10.1016/j.jcorpfin.2024.102644]
80 Pages Posted: 9 Mar 2020 Last revised: 4 Jan 2023
Date Written: January 4, 2023
Abstract
This paper identifies an externality of a firm's unionization that affects the financing decisions of other, non-unionized firms within a local labor market. We find that non-unionized firms increase their market leverage ratios by 1.8 to 2.0 percentage points following a union victory at other firms. As an alternative coping strategy, non-unionized firms also hold less cash reserves. This "shadow union" effect is more pronounced when the probability of unionization rises by a larger margin (e.g., when non-union firms have a larger fraction of middle-to-low wage workers or when shadow unions are formed multiple times in local labor markets). In addition, the effect is stronger when non-union firms face higher union rents conditional on being unionized (e.g., labor-intensive firms, firms located in states with lower unemployment rates, or firms operating in less competitive industries). These results are consistent with the heightened threat of unionization following shadow union organizing. Overall, our findings suggest that a shadow labor market institution creates a strategic incentive for non-unionized firms to use less conservative financial policies to combat the union threat.
Keywords: Shadow Union, Local Labor Market, Threat of Unionization, Corporate Financing Strategy
JEL Classification: J51, G32, J31, J42
Suggested Citation: Suggested Citation