Labor Unions and Corporate Debt Structures

Labor has a significant impact on a firm’s financial decisions. Some papers show thatfirms strategically use more debt to enhance their bargaining position against laborunions, while others argue that strong labor protection increases firms’ operatingleverage and leads to a lower debt ratio. In this project, we will extend this literature byrecognizing the fact that all these studies treat debt as uniform, ignoring itsheterogeneity. Specifically, we will investigate whether and how labor affects a firm’sdebt structure choices and how this decision interacts with firms’ leverage choices.We will first examine the relation between labor and a firm’s debt maturity structure.Following the literature, we use unionization as a proxy for labor’s influence. Existingtheories suggest different views on the direction of the impact. On the one hand, firmswith unionized workers could use short-term debt to strengthen their bargaining power,which suggests a negative relation between unionization and debt maturity. On the otherhand, unionization could cause operational inflexibility and increase the likelihood offinancial distress. This suggests unionized firms should have incentives to reduce theirexposure to liquidity risk by lengthening their debt maturity. Therefore, the net impactof unionization on a firm’s debt maturity structure is a prior uncertain. We will alsoexamine a firm’s choice between private debt and public debt. We hypothesize thatunionized firms value the flexibility of debt renegotiation and borrow more privately.Firms could also use strict covenants in private debt contracts as a bargaining toolagainst labor unions. Moreover, private debt allows firms to maintain informationasymmetry with labor unions.We take two approaches to examine the relation between unionization and debtstructure. First, we use balance sheet data to construct debt structure measures. Withthese measures we compare firms that elect to become unionized to those that voteagainst it. To address the identification concern, we use a regression discontinuitydesign; we also explore cross-sectional variation in the impact. Our second approach isincremental, focusing on new debt issues. We examine whether a firm starts to rely moreon a certain type of debt after firms become unionized. As an extension, we will use thepassage of several laws, such as state-level wrongful discharge laws, right-to-worklaws, and state repeal of unemployment insurance stoppage provisions, to examine theimpact of labor on a firm’s debt structure decision.