The Threat of Unionization, the Use of Debt, and the Preservation of Shareholder Wealth

By Bronars, Stephen G.; Deere, Donald R. | Quarterly Journal of Business and Economics, February 1991 | Go to article overview

The Threat of Unionization, the Use of Debt, and the Preservation of Shareholder Wealth


Bronars, Stephen G., Deere, Donald R., Quarterly Journal of Business and Economics


I. INTRODUCTION

Under U. S. labor law firms cannot prohibit their employees from attempting to form a collective bargaining unit. Firms can, however, take actions to reduce the impact of collective bargaining on profits. Given the apparently large effects of unions on shareholders' wealth presented by Ruback and Zimmerman |1984~ and others |Clark, 1984; Salinger, 1984; Voos and Mishel, 1986; Bronars and Deere, 1990~, we expect firms to protect shareholders' wealth from union appropriation.

One method of lessening the impact of unionization on shareholders is to reduce the probability of its occurrence. The firm can accomplish this by paying higher wages. In effect, the higher wage serves as a type of limit price. Because workers must bear the cost of union formation, firms can pay a limit wage that is strictly less than the union wage. Thus, although labor costs are increased by this strategy, profits are higher than if a union were to form. The firm can also alter its mix of employees to make it more difficult for a coalition favoring unionization to arise.(1)

This paper analyzes an alternative response to unionization: firms can use debt policy to limit the effect that a successful union has on shareholder wealth. A union can extract no more than the present value of future net cash flows at the time of unionization. By issuing debt instead of equity, firms are obligated to repay a portion of future revenues to creditors. Hence, these obligations limit the revenues that a union can extract without driving the firm into bankruptcy.(2)

Consider these two potential responses to the threat of unionization. Firms can pay a greater portion of cash flows to workers in an effort to stave off unionization, or firms can reduce the losses in the event of unionization by using debt to divert future cash flows to shareholders. Shareholders prefer the latter response because it shifts cash flows to them rather than to current (nonunion) workers. The paper carefully models the firm's debt choice in a union environment and then empirically analyzes the relationship between unionization and debt.

The key empirical implication of the model is that a firm facing a greater threat of unionization chooses a higher debt-equity ratio. Given that firms in heavily unionized industries have experienced greater union threats on average, we test this hypothesis by comparing industry unionization rates and industry average debt equity ratios. We find strong evidence of a positive relationship between unionization and debt-equity ratios using a set of large, publicly traded firms.

The next section analyzes how debt can be useful in limiting the effect that unionization has on the wealth of shareholders. The broad issues are discussed, and then two separate models of the union-firm negotiating process are used to derive implications for the relationship between the threat of collective bargaining and a firm's debt policy. Section III develops the empirical model, describes the estimation procedure, and presents the estimation results.

II. THEORETICAL CONSIDERATIONS

In order for shareholders to decide how to limit the impact of unionization, they must have some knowledge of the union-firm bargaining process. There is no consensus on modeling the bargaining between unions and firms. Traditional wage-setting models are criticized for their inefficiencies; rent-maximizing models may not be realistic; and more general Pareto optimal bargains that allow for union objectives that trade off employment and wages are unsatisfying because of their sensitivity to the specification of these objectives. Recent empirical work on this issue (see, e.g., MaCurdy and Pencavel |1986~, Brown and Ashenfelter |1986~, Eberts and Stone |1986~, Card |1986~, and Abowd |1989a~) is decidedly mixed. Given the lack of empirical support for any particular model, it is important not to rely on a single bargaining solution.

We begin by describing the basic setting in which the shareholders and the union reach an agreement. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

The Threat of Unionization, the Use of Debt, and the Preservation of Shareholder Wealth
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.