Capital Structure as a Strategic Variable: Evidence from Collective Bargaining

Abstract

I analyze the strategic use of debt financing to improve a firm's bargaining position with an important supplier -- organized labor. Because maintaining high levels of corporate liquidity can encourage workers to raise their wage demands, a firm with external finance constraints has an incentive to use the cash flow demands of debt service to improve its bargaining position with workers. Using both firm-level collective bargaining coverage and state changes in labor laws to identify changes in union bargaining power, I show that strategic incentives from union bargaining appear to have a substantial impact on corporate financing decisions.

Keywords: strategic investment, strategic capital structure, collective bargaining, union rent sharing, right-to-work laws, unemployment insurance work stoppage provision, buffer inventories

JEL Classification: D21, G32, J51, L14