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The Strategic Use of Corporate Cash Holdings in Collective Bargaining with Labor Unions

58 Pages Posted: 27 Apr 2007 Last revised: 28 May 2009

Sandy Klasa

University of Arizona - Department of Finance

William F. Maxwell

SMU - Cox School

Hernan Ortiz-Molina

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

Date Written: March 1, 2008

Abstract

We provide evidence that firms in more unionized industries strategically hold less cash to gain bargaining advantages over labor unions and shelter corporate income from their demands. Specifically, we show that corporate cash holdings are negatively related with industry unionization rates. We also find that this relation is stronger for firms that are likely to place a higher value on gaining a bargaining advantage over unions and weaker for those firms in which lower cash holdings provides less credible evidence that a firm is unable to concede to union demands. Additionally, we document that unionized firms manage their cash holdings downward prior to labor negotiations and that increases in cash holdings raise the probability of a strike. Finally, we show that unionization decreases the market value of a dollar of cash holdings. Overall, our findings indicate that firms trade-off the benefits of corporate cash holdings with the costs resulting from a weaker bargaining position with labor.

Keywords: Cash holdings, liquidity policy, hedging, labor unions

JEL Classification: G31, G32, J52

Suggested Citation

Klasa, Sandy and Maxwell, William F. and Ortiz-Molina, Hernan, The Strategic Use of Corporate Cash Holdings in Collective Bargaining with Labor Unions (March 1, 2008). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=982680

Sandy Klasa (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-8761 (Phone)

William F. Maxwell

SMU - Cox School ( email )

Maguire Bldg, RM 440C
Dallas, TX, TX 75214
United States

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)

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