Institutional Investors and Mispricing of Unionized Firms

Abstract

We examine investment by different types of institutional investors in underperforming firms with agency problems complicated by laws and regulations: U.S. firms with strong labor unions. As unions have special powers granted by government, unions have to serve the interests of politicians if they want to maintain or increase these powers. Moreover, these powers allow unions to have a significant negative impact on firms. We find that more knowledgeable institutional investors reduce their investment in firms with strong unions. On the other hand, passive investors have high investment in these firms and bear a disproportionately high portion of unionization costs.

Keywords: Institutional investors, Hedge funds, Passive investors, Labor unions, Labor laws, Stock performance

JEL Classification: G14, G23, G38