Hostname: page-component-6bf8c574d5-mggfc Total loading time: 0 Render date: 2025-02-22T07:21:30.389Z Has data issue: false hasContentIssue false
  • English
  • Français

Labor Unions, Operating Flexibility, and the Cost ofEquity

Published online by Cambridge University Press:  26 October 2010

Huafeng Jason Chen ,
Marcin Kacperczyk  and
Hernán Ortiz-Molina
Huafeng Jason Chen
Affiliation:
Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC V6T 1Z2, Canada. [email protected]
Marcin Kacperczyk
Affiliation:
Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC V6T 1Z2, Canada. [email protected]
Hernán Ortiz-Molina
Affiliation:
Stern School of Business, New York University, 44 W. 4th St., Ste. 9-78, New York, NY 10012 and National Bureau of Economic Research. [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

We study whether the constraints on firms’ operations imposed by laborunions affect firms’ costs of equity. The cost of equity issignificantly higher for firms in more unionized industries. This effect holdsafter controlling for several industry and firm characteristics, is robust toendogeneity concerns, and is not driven by omitted variables. Moreover, theunionization premium is stronger when unions face a more favorable bargainingenvironment and is highly countercyclical. Unionization is also positivelyrelated to various measures of operating leverage. Our findings suggest thatlabor unions increase firms’ costs of equity by decreasingfirms’ operating flexibility.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 1 , February 2011 , pp. 25 - 58
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abowd, J. M . “The Effect of Wage Bargains on the Stock Market Value of the Firm.” American Economic Review, 79 (1989), 774–800.Google Scholar
Abraham, K. G., and Medoff, J. L.. “Length of Service and Layoffs in Union and Nonunion Work Groups.” Industrial and Labor Relations Review, 38 (1984), 87–97.CrossRefGoogle Scholar
Booth, L. . “The Influence of Production Technology on Risk and the Cost of Capital.” Journal of Financial and Quantitative Analysis, 26 (1991), 109–127.CrossRefGoogle Scholar
Bronars, S. G., and Deere, D. R.. “The Threat of Unionization, the Use of Debt, and the Preservation of Shareholder Wealth.” Quarterly Journal of Economics, 106 (1991), 231–254.CrossRefGoogle Scholar
Carlson, M.; Fisher, A.; and Giammarino, R.. “Corporate Investment and Asset Price Dynamics: Implications for the Cross-Section of Returns.” Journal of Finance, 59 (2004), 2577–2603.CrossRefGoogle Scholar
Cochrane, J. H . “Production-Based Asset Pricing and the Link between Stock Returns and Economic Fluctuations.” Journal of Finance, 46 (1991), 207–234.Google Scholar
Cochrane, J. H . “A Cross-Sectional Test of an Investment-Based Asset Pricing Model.” Journal of Political Economy, 104 (1996), 572–621.CrossRefGoogle Scholar
Connolly, R. A.; Hirsch, B. T.; and Hirschey, M.. “Union Rent Seeking, Intangible Capital, and Market Value of the Firm.” Review of Economics and Statistics, 68 (1986), 567–577.CrossRefGoogle Scholar
Cooper, I. “Asset Pricing Implications of Nonconvex Adjustment Costs and Irreversibility of Investment.” Journal of Finance, 61 (2006), 139–170.CrossRefGoogle Scholar
Danthine, J.-P., and Donaldson, J. B.. “Labour Relations and Asset Returns.” Review of Economic Studies, 69 (2002), 41–64.CrossRefGoogle Scholar
Dowrick, S., and Spencer, B. J.. “Union Attitudes to Labor-Saving Innovation: When Are Unions Luddites?” Journal of Labor Economics, 12 (1994), 316–344.CrossRefGoogle Scholar
Ellwood, D. T., and Fine, G.. “The Impact of Right-to-Work Laws on Union Organizing.” Journal of Political Economy, 95 (1987), 250–273.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
García-Feijóo, L., and Jorgensen, R. D.. “Can Operating Leverage Be the Cause of the Value Premium?” Financial Management, 39 (2010), 1127–1153.CrossRefGoogle Scholar
Gebhardt, W. R.; Lee, C. M. C.; and Swaminathan, B.. “Toward an Implied Cost of Capital.” Journal of Accounting Research, 39 (2001), 135–176.CrossRefGoogle Scholar
Gomes, J.; Kogan, L.; and Zhang, L.. “Equilibrium Cross Section of Returns.” Journal of Political Economy, 111 (2003), 693–732.CrossRefGoogle Scholar
Gourio, F. “Labor Leverage, Firm’s Heterogeneous Sensitivities to the Business Cycle, and the Cross-Section of Expected Returns.” Working Paper, Boston University (2007).Google Scholar
Gramm, C. L., and Schnell, J. F.. “The Use of Flexible Staffing Arrangements in Core Production Jobs.” Industrial and Labor Relations Review, 54 (2001), 245–258.CrossRefGoogle Scholar
Guay, W. R.; Kothari, S. P.; and Shu, S.. “Properties of Implied Cost of Capital Using Analysts’ Forecasts.” Working Paper, Massachusetts Institute of Technology (2006).Google Scholar
Hirsch, B. T . “The Determinants of Unionization: An Analysis of Interarea Differences.” Industrial and Labor Relations Review, 33 (1980), 147–161.CrossRefGoogle Scholar
Hirsch, B. T . “The Interindustry Structure of Unionism, Earnings, and Earnings Dispersion.” Industrial and Labor Relations Review, 36 (1982), 22–39.CrossRefGoogle Scholar
Hirsch, B. T . Labor Unions and the Economic Performance of Firms. Kalamazoo, MI: W. E. Upjohn Institute for Employment Research (1991a).CrossRefGoogle Scholar
Hirsch, B. T . “Union Coverage and Profitability among U.S. Firms.” Review of Economics and Statistics, 73 (1991b), 69–77.CrossRefGoogle Scholar
Hirsch, B. T., and Macpherson, D. A.. “Union Membership and Coverage Database from the Current Population Survey: Note.” Industrial and Labor Relations Review, 56 (2003), 349–354.CrossRefGoogle Scholar
Ittner, C. D.; Lambert, R. A.; and Larcker, D. F.. “The Structure and Performance Consequences of Equity Grants to Employees of New Economy Firms.” Journal of Accounting and Economics, 34 (2003), 89–127.CrossRefGoogle Scholar
Jagannathan, R., and Wang, Z.. “The Conditional CAPM and the Cross-Section of Expected Returns.” Journal of Finance, 51 (1996), 3–53.Google Scholar
Jermann, U. J . “Asset Pricing in Production Economies.” Journal of Monetary Economics, 41 (1998), 257–275.Google Scholar
Kahle, K. M., and Walkling, R. A.. “The Impact of Industry Classifications on Financial Research.” Journal of Financial and Quantitative Analysis, 31 (1996), 309–335.CrossRefGoogle Scholar
Karpoff, J. M.; Malatesta, P. H.; and Walkling, R. A.. “Corporate Governance and Shareholder Initiatives: Empirical Evidence.” Journal of Financial Economics, 42 (1996), 365–395.Google Scholar
Kogan, L. “Asset Prices and Real Investment.” Journal of Financial Economics, 73 (2004), 411–431.CrossRefGoogle Scholar
Lee, C.; Ng, D.; and Swaminathan, B.. “Testing International Asset Pricing Models Using Implied Costs of Capital.” Journal of Financial and Quantitative Analysis, 44 (2009), 307–335.CrossRefGoogle Scholar
Lev, B. “On the Association between Operating Leverage and Risk.” Journal of Financial and Quantitative Analysis, 9 (1974), 627–641.CrossRefGoogle Scholar
Lewis, H. G . “Union Relative Wage Effects.” In Handbook of Labor Economics, Vol. II, Ashenfelter, O. C. and Layard, R., eds. New York, NY: Elsevier Science (1986), 1139–1181.Google Scholar
Lipset, S. M., and Katchanovski, I.. “The Future of Private Sector Unions in the U.S.” Journal of Labor Research, 22 (2001), 229–244.CrossRefGoogle Scholar
Mandelker, G. N., and Rhee, S. G.. “The Impact of the Degrees of Operating and Financial Leverage on Systematic Risk of Common Stock.” Journal of Financial and Quantitative Analysis, 19 (1984), 45–57.CrossRefGoogle Scholar
Matsa, D. A . “Capital Structure as a Strategic Variable: Evidence from Collective Bargaining.” Journal of Finance, 65 (2010), 1197–1232.CrossRefGoogle Scholar
McLaughlin, D. B., and Fraser, D. A.. “Collective Bargaining: The Next Twenty Years.” Annals of the American Academy of Political and Social Science, 473 (1984), 33–39.CrossRefGoogle Scholar
Merz, M., and Yashiv, E.. “Labor and the Market Value of the Firm.” American Economic Review, 97 (2007), 1419–1431.CrossRefGoogle Scholar
Mitchell, D. J. B . “Wage Flexibility: Then and Now.” Industrial Relations, 24 (1985), 266–279.CrossRefGoogle Scholar
Modigliani, F., and Miller, M. H.. “The Cost of Capital, Corporation Finance and the Theory of Investment.” American Economic Review, 48 (1958), 261–297.Google Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.CrossRefGoogle Scholar
Novy-Marx, R. . “Operating Leverage.” Review of Finance, forthcoming (2011).CrossRefGoogle Scholar
Pástor, Ľ; Sinha, M.; and Swaminathan, B.. “Estimating the Intertemporal Risk–Return Tradeoff Using the Implied Cost of Capital.” Journal of Finance, 63 (2008), 2859–2897.Google Scholar
Rose, D. C . “Are Strikes Less Effective in Conglomerate Firms?” Industrial and Labor Relations Review, 45 (1991), 131–144.CrossRefGoogle Scholar
Rosett, J. G . “Equity Risk and the Labor Stock: The Case of Union Contracts.” Journal of Accounting Research, 39 (2001), 337–364.CrossRefGoogle Scholar
Rosett, J. G . “Labor Leverage, Equity Risk, and Corporate Policy Choice.” European Accounting Review, 12 (2003), 699–732.CrossRefGoogle Scholar
Ruback, R. S., and Zimmerman, M. B.. “Unionization and Profitability: Evidence from the Capital Market.” Journal of Political Economy, 92 (1984), 1134–1157.CrossRefGoogle Scholar
Rubinstein, M. E . “A Mean-Variance Synthesis of Corporate Financial Theory.” Journal of Finance, 28 (1973), 167–181.Google Scholar
Santos, T., and Veronesi, P.. “Labor Income and Predictable Stock Returns.” Review of Financial Studies, 19 (2006), 1–44.CrossRefGoogle Scholar
Wunnava, P., and Okunade, A. A.. “Countercyclical Union Wage Premium? Evidence for the 1980s.” Journal of Labor Research, 17 (1996), 289–296.Google Scholar
Zhang, L. “The Value Premium.” Journal of Finance, 60 (2005), 67–103.CrossRefGoogle Scholar