Does Capital Structure Affect the Behavior of Non-Financial Stakeholders? An Empirical Investigation into Leverage and Union Strikes

Abstract

We use contract negotiation data to study how leverage affects the interaction between firms and an important non-financial stakeholder, labor unions. Consistent with the idea that leverage diminishes the bargaining position of labor, we find that unions are less likely to strike when a firm has high leverage or increases leverage prior to a contract negotiation. We also find large leverage increases after a strike, consistent with the idea that firms intentionally use leverage to improve their bargaining position. This post-strike increase in leverage particularly pronounced when the union wins the strike. Moreover, we do not find any clear indication that such increases in leverage are linked to changes in investments. In addition, firms that experience a strike subsequently invest more internationally and in right-to-work states where union are afforded fewer legal protections, and they increase their disposal of production units that are located in states where strikes have occurred.

Keywords: leverage, non-financial stakeholders, contract negotiations, union strikes

JEL Classification: G32, J52