The Bright Side of Unionization: The Case of Stock Price Crash Risk

Posted: 11 Jun 2019

See all articles by Jeong-Bon Kim

Jeong-Bon Kim

City University of Hong Kong

Eliza Xia Zhang

University of Washington Tacoma

Kai Zhong

University of International Business and Economics (UIBE)

Date Written: May 25, 2019

Abstract

This study examines whether and how labor unionization influences stock price crash risk. Using a regression discontinuity design that employs union elections as an exogenous shock yielding local variation in unionization, we find that unionization leads to a significant decline in stock price crash risk. We further explore the underlying mechanisms through which unionization affects crash risk and find that labor unions constrain managerial resource diversion and overinvestment, demand less risk-taking, and facilitate transparent information flow, which in turn reduces crash risk. Overall, our results suggest that unions play an important governance role. Our study sheds new light on a formerly under-researched beneficial impact of unionization and the role that organized labor plays in influencing extreme downside risk in the equity market.

Keywords: unionization, stock price crash risk, governance

Suggested Citation

Kim, Jeong-Bon and Zhang, Eliza Xia and Zhong, Kai, The Bright Side of Unionization: The Case of Stock Price Crash Risk (May 25, 2019). Available at SSRN: https://ssrn.com/abstract=3394379 or http://dx.doi.org/10.2139/ssrn.3394379

Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Eliza Xia Zhang (Contact Author)

University of Washington Tacoma ( email )

310 Dougan
Tacoma, WA WASHINGTON 98402
United States
5738235607 (Phone)
5738235607 (Fax)

Kai Zhong

University of International Business and Economics (UIBE) ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

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