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The impact of labor unions on investment-cash flow sensitivity

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  • Chen, Yan-Shing
  • Chen, I-Ju

Abstract

This paper empirically examines how labor unions affect investment-cash flow sensitivity using samples from the US covering the period of 1984–2009. We find a significant positive union effect using a q model of investment. The capital expenditures of firms are 1.71 times more sensitive to internal cash flows when unionization rates increase one standard deviation from the mean. This effect holds when we control for other proxies of financial constraints. In addition, unionized firms are associated with lower cash–cash flow sensitivity, which suggests that the higher investment-cash flow sensitivity in unionized firms is primarily driven by the incentive of these firms to reduce liquidity and enhance bargaining power against the union. We also show that the above union effects become more pronounced during labor contract negotiation years.

Suggested Citation

  • Chen, Yan-Shing & Chen, I-Ju, 2013. "The impact of labor unions on investment-cash flow sensitivity," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2408-2418.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:7:p:2408-2418
    DOI: 10.1016/j.jbankfin.2013.02.001
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    Cited by:

    1. 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.
    2. repec:eee:advacc:v:36:y:2017:i:c:p:11-26 is not listed on IDEAS
    3. Hamdi Ben-Nasr & Abdullah Alshwer, 2015. "How Informed Stock Trading Can Affect Labor Investment Efficiency," Proceedings of Business and Management Conferences 2304077, International Institute of Social and Economic Sciences.

    More about this item

    Keywords

    Labor unions; Investment-cash flow sensitivity; Cash–cash flow sensitivity; Financial constraint; Bargaining power;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • J51 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Trade Unions: Objectives, Structure, and Effects
    • J52 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining - - - Dispute Resolution: Strikes, Arbitration, and Mediation

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