Payout Policy Under Enhanced Labor Power: Evidence from a New Approach

Abstract

We study labor power as an important but largely under-explored determinant of payout policy. Using a regression discontinuity design that exploits locally exogenous variation in labor’s collective bargaining power, we find that an increase in labor power generated by close-call union elections leads to a lower level of dividend and total payout in subsequent years. Operating flexibility appears to be a plausible underlying mechanism through which labor power influences corporate payout. Firms use the saved earnings from reductions in payout to invest in net working capital rather than paying off debt or increasing cash holdings. Our paper sheds new light on the determinants of payout policy and the role of labor power in corporate finance decisions.

Keywords: Payout policy, operating flexibility, labor unions, regression discontinuity design

JEL Classification: G35, G31, J51