IDEAS home Printed from https://ideas.repec.org/a/udc/esteco/v43y2016i1p53-69.html
   My bibliography  Save this article

Relationship between leverage and the bargaining power of labor unions: evidence from theoretical and empirical perspectives

Author

Listed:
  • Chil Sun Choi
  • Pando Sohn
  • Ji-Yong Seo

Abstract

This study examines whether a firm’s leverage can be used strategically to improve its bargaining position with an organized labor union using samples of non-financial firms listed on the Korean Stock Exchange (KSE) from 1999 to 2013. Through empirical testing, we find that the portfolio with the lowest union labor coverage has the lowest leverage, while the portfolio with the highest union labor coverage has the highest leverage. We also find that collective bargaining power positively affects leverage through the regression of leverage on the bargaining power of the labor union, regardless of the analysis methods, such as static and dynamic models. With a robustness test model that used the industry adjusted labor union concentration index (IUCI), we obtain evidence that collective bargaining power positively influences leverage, which corresponds with the regression results. In conclusion, we suggest the existence of evidence demonstrating that variables related to labor unions affect leverage levels, as suggested in previous studies.

Suggested Citation

  • Chil Sun Choi & Pando Sohn & Ji-Yong Seo, 2016. "Relationship between leverage and the bargaining power of labor unions: evidence from theoretical and empirical perspectives," Estudios de Economia, University of Chile, Department of Economics, vol. 43(1 Year 20), pages 53-69, June.
    • Handle: RePEc:udc:esteco:v:43:y:2016:i:1:p:53-69
    as

    Download full text from publisher

    File URL: http://www.econ.uchile.cl/uploads/publicacion/c60de2781674299e82407436b578337a6590c113.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. DeAngelo, Harry & DeAngelo, Linda, 1991. "Union negotiations and corporate policy *1: A study of labor concessions in the domestic steel industry during the 1980s," Journal of Financial Economics, Elsevier, vol. 30(1), pages 3-43, November.
    2. Flannery, Mark J. & Rangan, Kasturi P., 2006. "Partial adjustment toward target capital structures," Journal of Financial Economics, Elsevier, vol. 79(3), pages 469-506, March.
    3. David A. Matsa, 2010. "Capital Structure as a Strategic Variable: Evidence from Collective Bargaining," Journal of Finance, American Finance Association, vol. 65(3), pages 1197-1232, June.
    4. Chen, Huafeng Jason & Kacperczyk, Marcin & Ortiz-Molina, Hernán, 2011. "Labor Unions, Operating Flexibility, and the Cost of Equity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(1), pages 25-58, February.
    5. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-329, May.
    6. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    7. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    8. Holmstrom, Bengt & Tirole, Jean, 1996. "Modeling Aggregate Liquidity," American Economic Review, American Economic Association, vol. 86(2), pages 187-191, May.
    9. Baldwin, Carliss Y, 1983. "Productivity and Labor Unions: An Application of the Theory of Self-Enforcing Contracts," The Journal of Business, University of Chicago Press, vol. 56(2), pages 155-185, April.
    10. David S. Lee & Alexandre Mas, 2012. "Long-Run Impacts of Unions on Firms: New Evidence from Financial Markets, 1961--1999," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 333-378.
    11. Stephen G. Bronars & Donald R. Deere, 1991. "The Threat of Unionization, the Use of Debt, and the Preservation of Shareholder Wealth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(1), pages 231-254.
    12. Klasa, Sandy & Maxwell, William F. & Ortiz-Molina, Hernán, 2009. "The strategic use of corporate cash holdings in collective bargaining with labor unions," Journal of Financial Economics, Elsevier, vol. 92(3), pages 421-442, June.
    13. Michael L. Lemmon & Michael R. Roberts & Jaime F. Zender, 2008. "Back to the Beginning: Persistence and the Cross‐Section of Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 63(4), pages 1575-1608, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ju Ryum Chung & Eun Jung Cho & Ho-Young Lee & Myungsoo Son, 2017. "The impact of labour unions on external auditor selection and audit scope: evidence from the Korean market," Applied Economics, Taylor & Francis Journals, vol. 49(48), pages 4833-4850, October.
    2. Ilhang Shin & Sorah Park & Seong Pyo Cho & Seungho Choi, 2020. "The effect of labor unions on innovation and market valuation in business group affiliations: new evidence from South Korea," Asian Business & Management, Palgrave Macmillan, vol. 19(2), pages 239-270, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    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. Schmalz, Martin, 2018. "Unionization, Cash, and Leverage," CEPR Discussion Papers 12595, C.E.P.R. Discussion Papers.
    3. Woods, Keegan & Tan, Kelvin Jui Keng & Faff, Robert, 2019. "Labor unions and corporate financial leverage: The bargaining device versus crowding-out hypotheses," Journal of Financial Intermediation, Elsevier, vol. 37(C), pages 28-44.
    4. Olga Kuzmina, 2013. "Operating Flexibility and Capital Structure: Evidence from a Natural Experiment," Working Papers w0197, New Economic School (NES).
    5. Dalia Marciukaityte, 2015. "Right-to-Work Laws and Financial Leverage," Financial Management, Financial Management Association International, vol. 44(1), pages 147-175, March.
    6. Woon Sau Leung & Jing Li & Jiong Sun, 2020. "Labor Unionization and Supply‐Chain Partners’ Performance," Production and Operations Management, Production and Operations Management Society, vol. 29(5), pages 1325-1353, May.
    7. Di Giuli, Alberta & Matta, Rafael & Romec, Arthur, 2023. "Capital structure and reversible bargaining tools: Evidence from union-sponsored shareholder proposals," Journal of Banking & Finance, Elsevier, vol. 149(C).
    8. Brett W. Myers & Alessio Saretto, 2016. "Does Capital Structure Affect the Behavior of Nonfinancial Stakeholders? An Empirical Investigation into Leverage and Union Strikes," Management Science, INFORMS, vol. 62(11), pages 3235-3253, November.
    9. Zhenxu Tong, 2015. "Labor Unions and Forms of Corporate Liquidity," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(7-8), pages 1007-1039, September.
    10. In‐Mu Haw & Bingbing Hu & Donghui Wu & Xu Zhang, 2018. "Having a Finger in the Pie: Labor Power and Corporate Payout Policy," Financial Management, Financial Management Association International, vol. 47(4), pages 993-1027, December.
    11. Sheng-Syan Chen & Yan-Shing Chen & Yanzhi Wang, 2015. "Does Labor Power Affect the Likelihood of a Share Repurchase?," Financial Management, Financial Management Association International, vol. 44(3), pages 623-653, September.
    12. Andres, Christian & Cumming, Douglas & Karabiber, Timur & Schweizer, Denis, 2014. "Do markets anticipate capital structure decisions? — Feedback effects in equity liquidity," Journal of Corporate Finance, Elsevier, vol. 27(C), pages 133-156.
    13. Surenderrao Komera & P. J. Jijo Lukose, 2016. "Heterogeneity and Asymmetry in Speed of Leverage Adjustment: The Indian Experience," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(03), pages 1-26, September.
    14. Olga Kuzmina, 2023. "Employment Flexibility and Capital Structure: Evidence from a Natural Experiment," Management Science, INFORMS, vol. 69(9), pages 4992-5017, September.
    15. Ahmad, Muhammad Farooq & Kowalewski, Oskar, 2021. "Collective bargaining power and corporate cash policy," International Review of Law and Economics, Elsevier, vol. 68(C).
    16. Ilhang Shin & Sorah Park & Seong Pyo Cho & Seungho Choi, 2020. "The effect of labor unions on innovation and market valuation in business group affiliations: new evidence from South Korea," Asian Business & Management, Palgrave Macmillan, vol. 19(2), pages 239-270, April.
    17. Özgür Arslan‐Ayaydin & James Thewissen & Wouter Torsin, 2021. "Disclosure tone management and labor unions," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(1-2), pages 102-147, January.
    18. Li, Mingming & Chiang, Yao-Min & Liu, Haiming, 2023. "Employment protection and leverage adjustment speed: Evidence from China," Research in International Business and Finance, Elsevier, vol. 64(C).
    19. Ormazabal, Gaizka, 2018. "The Role of Stakeholders in Corporate Governance: A View from Accounting Research," CEPR Discussion Papers 12775, C.E.P.R. Discussion Papers.
    20. Efraim Benmelech & Nittai K. Bergman & Ricardo J. Enriquez, 2012. "Negotiating with Labor under Financial Distress," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 1(1), pages 28-67.

    More about this item

    Keywords

    Leverage; bargaining position; union labor coverage; static and dynamic models.;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:udc:esteco:v:43:y:2016:i:1:p:53-69. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Verónica Kunze (email available below). General contact details of provider: https://edirc.repec.org/data/deuclcl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.