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Do labor unions affect firm payout policy?: Operating leverage and rent extraction effects

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  • Chino, Atsushi

Abstract

While previous literature documents weak effects of unionization on payout policy on average, we find that this average relationship hides significant heterogeneous effects of unionization on payouts across firms that depend on firm profitability. The effect of unionization on payouts is negative for low-profitability firms but positive for high-profitability firms. We posit that labor unions (i) increase operating risk, which negatively affects payouts, but (ii) increase potential for rent extraction from unions, which could induce shareholders to demand positive payouts. Higher profitability mitigates the negative effect while strengthening the positive effect, making the relation between unionization and payouts less negative or more positive. We provide evidence consistent with both the negative and positive effects of unionization on payouts. Our empirical design mitigates endogeneity concerns. Further, an instrumental variable analysis and a cross-sectional test using right-to-work laws confirm that endogeneity is unlikely to drive our results.

Suggested Citation

  • Chino, Atsushi, 2016. "Do labor unions affect firm payout policy?: Operating leverage and rent extraction effects," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 156-178.
  • Handle: RePEc:eee:corfin:v:41:y:2016:i:c:p:156-178
    DOI: 10.1016/j.jcorpfin.2016.08.017
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    Cited by:

    1. Keishi Fujiyama & Makoto Kuroki, 2017. "Employee Downsizing and Accounting Choices: Evidence from Japan," Discussion Paper Series DP2017-06, Research Institute for Economics & Business Administration, Kobe University, revised Sep 2017.
    2. repec:eee:jbfina:v:88:y:2018:i:c:p:408-422 is not listed on IDEAS
    3. Pezone, Vincenzo, 2017. "Unemployment Risk and Payout Policies," MPRA Paper 83918, University Library of Munich, Germany.

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