Capital Structure and Reversible Bargaining Tools: Theory and Evidence from Union-Sponsored Shareholder Proposals
52 Pages Posted: 27 Nov 2017 Last revised: 22 Feb 2022
Date Written: February 1, 2018
We model the interplay of capital structure and labor union reversible bargaining tools (such as union-sponsored shareholder proposals). Unions counter firms’ ex-post strategic use of debt by employing bargaining tools that can be reversed depending on the state of nature. Firms adjust debt ex ante to make underinvestment a credible threat if the bargaining tools are not reversed. The use of reversible bargaining tools is negatively affected by debt, drops in low states for riskier firms, and reduces the profits of safer firms. Consistently, union-sponsored shareholder proposals decrease in leverage, drop for riskier firms during the 2008-2009 financial crisis, and negatively relate to safer firms’ profitability.
Keywords: Leverage, Capital Structure, Unions, Labor Unions, Shareholder Proposals
JEL Classification: G32, J51, J53
Suggested Citation: Suggested Citation