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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. jason.chen@sauder.ubc.ca
Marcin Kacperczyk
Affiliation:
Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC V6T 1Z2, Canada. ortizmolina@sauder.ubc.ca
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. mkacperc@stern.nyu.edu
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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

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