Labor Unions, Operating Flexibility, and the Cost of Equity

56 Pages Posted: 21 Sep 2006 Last revised: 25 Aug 2012

See all articles by Huafeng (Jason) Chen

Huafeng (Jason) Chen

Fudan University - Fanhai International School of Finance (FISF)

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics; Centre for Economic Policy Research (CEPR)

Hernan Ortiz-Molina

University of British Columbia (UBC) - Sauder School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: January 2009

Abstract

We examine the impact of operating flexibility on firms' costs of equity by focusing on the constraints that labor unions impose on firms' operations. We find that the cost of equity is higher for firms in more unionized industries. The effect holds after we control for a host of industry- and firm-level characteristics, and is stronger when unions face a more favorable bargaining environment. The results are not driven by an industry life-cycle effect, unobservable time-invariant characteristics, and the magnitudes we estimated are robust to potential endogeneity concerns. The spread in the cost of equity between high- and low-unionization portfolios is highly countercyclical. Unionization is also positively related to various measures of operating leverage, and it is associated with both its labor and non-labor components. Our findings are consistent with the view that labor unions increase firms' costs of equity by decreasing their operating flexibility.

Keywords: labor unions, operating flexibility, cost of equity

JEL Classification: G12, J51

Suggested Citation

Chen, Huafeng (Jason) and Kacperczyk, Marcin T. and Ortiz-Molina, Hernan, Labor Unions, Operating Flexibility, and the Cost of Equity (January 2009). AFA 2008 New Orleans Meetings Paper, Available at SSRN: https://ssrn.com/abstract=931580 or http://dx.doi.org/10.2139/ssrn.931580

Huafeng (Jason) Chen (Contact Author)

Fudan University - Fanhai International School of Finance (FISF) ( email )

220 Handan Road
Shanghai, 200433
China

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Hernan Ortiz-Molina

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-6095 (Phone)
604-822-4695 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,152
Abstract Views
3,426
rank
22,918
PlumX Metrics