THE GOVERNANCE ROLE OF LABOR UNIONS IN IMPROVING INVESTMENT EFFICIENCY
Abstract
We focus on the role that labor unions can play in influencing firms’ efficiency in corporate investment decisions where investment efficiency is defined as the extent to which deviations from optimal investment levels are minimized. We argue that unions may not simply be adversaries of managements as is often believed but have incentives to monitor managements in ways similar to that of other corporate governance players. These incentives stem from the fact that unions, like other corporate stakeholders, are adversely affected by investment inefficiencies that may result from firm-level overinvestment and underinvestment decisions. Consistent with this explanation, we find that labor unionization is indeed positively associated with improvements in investment efficiency and that these effects are generally stronger in bargaining environments that are favorable to unions. For instance, union effects in improving investment efficiencies are stronger in states where the Democratic Party is more influential and in states which have not enacted legislations that restrict union activities. These results indicate that union monitoring of investment efficiency is more likely to occur through channels that are a part of unions’ collective bargaining processes. Our results are robust to different measures of investment efficiency, different empirical specifications, and endogeneity of union membership.
JEL Classification Codes: J51, J59, O16, G31.
References
Abel, A. B. (1983). Optimal investment under uncertainty. The American Economic Review, 73(1), 228-233.
Amihud, Y., & Lev, B. (1981). Risk reduction as a managerial motive for conglomerate mergers. The Bell Journal of Economics, 12(2), 605-617. https://doi.org/10.2307/3003575
Baldwin, C. Y. (1983). Productivity and labor unions: An application of the theory of self-enforcing contracts. The Journal of Business, 56(2), 155-185. https://doi.org/10.1086/296195
Banning, K., & Chiles, T. (2007). Trade-offs in the labor union-CEO compensation relationship. Journal of Labor Research, 28(2), 347-357. https://doi.org/10.1007/BF03380050
Biddle, G. C., & Hilary, G. (2006). Accounting quality and firm-level capital investment. The Accounting Review, 81(5), 963-982. https://doi.org/10.2308/accr.2006.81.5.963
Biddle, G. C., Hilary, G., & Verdi, R. S. (2009). How does financial reporting quality relate to investment efficiency? Journal of Accounting and Economics, 48(2), 112-131. https://doi:10.1016/j.jacceco.2009.09.001
Blanchflower, D. G., Crouchley, R., Estrin, S., & Oswald, A. (1990). Unemployment and the Demand for Unions. NBER Working Papers (No. w3251). National Bureau of Economic Research.
Bradley, D., Kim, I., & Tian, X. (2017). Do unions affect innovation? Management Science, 63(7), 2049-2395. https://doi.org/10.1287/mnsc.2015.2414
Bronars, S. G., & Deere, D. R. (1993). Unionization, incomplete contracting, and capital investment. Journal of Business, 66(1), 117-132. https://doi.org/10.1086/296596
Chen, H. J., Kacperczyk, M., & Ortiz-Molina, H. (2011). Labor unions, operating flexibility, and the cost of equity. Journal of Financial and Quantitative Analysis, 46(1), 25-58. https://doi.org/10.1017/S0022109010000645
Chen, H. J., Kacperczyk, M., & Ortiz-Molina, H. (2012). Do nonfinancial stakeholders affect the pricing of risky debt? Evidence from unionized workers. Review of Finance, 16(2), 347-383. https://doi.org/10.1093/rof/rfq028
Cho, H., Lee, B. B., Lee, W., & Sohn, B. C. (2017). Do labor unions always lead to underinvestment? Journal of Management Accounting Research, 29(1), 45-66. https://doi.org/10.2308/jmar-51534
Chung, J. R., Cho, E. J., Lee, H. Y., & Son, M. (2017). The impact of labour unions on external auditor selection and audit scope: evidence from the Korean market. Applied Economics, 49, 4833-4850. https://doi.org/10.1080/00036846.2017.1296546
Denny, K., & Nickell, S. (1991). Unions and investment in British manufacturing industry. British Journal of Industrial Relations, 29(1), 113-121. https://doi.org/10.1111/j.1467-8543.1991.tb00231.x
Ellwood, D. T., & Fine, G. (1987). The impact of right-to-work laws on union organizing. The Journal of Political Economy, 95(2), 250-273. https://doi.org/10.1086/261454
Fama, E. F., & MacBeth, J. D. (1973). Risk, return, and equilibrium: Empirical tests. The Journal of Political Economy, 81(3), 607–636. https://doi.org/10.1086/260061
Freeman, R. B., & Medoff, J. L. (1979). The two faces of unionism. The Public Interest, 57, 69-93.
Hamm, S. J. W., Jung, B., & Lee, W. J. (2018). Labor unions and income smoothing. Contemporary Accounting Research, 35(3), 1201-1228. https://doi.org/10.1111/1911-3846.12321
Hartford, W. F. (1996). Where is Our Responsibility?: Unions and Economic Change in the New England Textile Industry, 1870-1960. University of Massachusetts Press.
Hendricks, W. (1977). Regulation and labor earnings. The Bell Journal of Economics, 8(2), 483-496. https://doi.org/10.2307/3003298
Hilary, G. (2006). Organized labor and information asymmetry in the financial markets. Review of Accounting Studies, 11(4), 525-548. https://doi.org/10.1007/s11142-006-9015-y
Hirsch, B. T. (1991). Union coverage and profitability among US firms. The Review of Economics and Statistics, 73(1), 69-77. https://doi.org/10.2307/2109688
Hirsch, B. T., & Berger, M. C. (1984). Union membership determination and industry characteristics. Southern Economic Journal, 50(3), 665-679. https://doi.org/10.2307/1057983
Hirsch, B. T., & Macpherson, D. A. (2003). Union membership and coverage database from the current population survey: Note. Industrial & Labor Relations Review, 56(2), 349-354. https://doi.org/10.1177/001979390305600208
Hsieh, H. Y. S., Jung, B., & Yi, H. (2017). The impact of non-financial stakeholders on accounting conservatism: The case of labor unions. Seoul Journal of Business, 23(1), 1-38. https://doi.org/10.35152/snusjb.2017.23.1.001
Jensen, M. C. (1986). Agency cost of free cash flow, corporate finance, and takeovers. Corporate Finance, and Takeovers. The American Economic Review, 76(2), 323-329.
Jensen, M. C. (2010). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 22(1), 32-42. https://doi.org/10.1111/j.1745-6622.2010.00259.x
Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
Klasa, S., Maxwell, W. F., & Ortiz-Molina, H. (2009). The strategic use of corporate cash holdings in collective bargaining with labor unions. Journal of Financial Economics, 92(3), 421-442. https://doi.org/10.1016/j.jfineco.2008.07.003
Liberty, S. E., & Zimmerman, J. L. (1986). Labor union contract negotiations and accounting choices. Accounting Review, 61(4), 692-712.
Opler, T., Pinkowitz, L., Stulz, R., & Williamson, R. (1999). The determinants and implications of corporate cash holdings. Journal of Financial Economics, 52(1), 3-46. https://doi.org/10.1016/S0304-405X(99)00003-3
Priddle, A., & Snavely, B. (2015, November 9). Jobs, plant investment cornerstone of Ford-UAW contract. Detroit Free Press.
Richardson, S. (2006). Over-investment of free cash flow. Review of Accounting Studies, 11(2-3), 159-189. https://doi.org/10.1007/s11142-006-9012-1
Stiglitz, J. E., & Weiss, A. (1981). Credit rationing in markets with imperfect information. The American Economic Review, 71(3), 393-410.
Surowiecki, J. (2016, April 18). System Overload. The Financial Page.
Zingales, L. (1998). Survival of the Fittest or the Fattest? Exit and Financing in the Trucking Industry. Journal of Finance, 53(3), 905-938. https://doi.org/10.1111/0022-1082.00039
Copyright (c) 2022 Yong-Chul Shin, Surjit Tinaikar, Yu Zhang
This work is licensed under a Creative Commons Attribution 4.0 International License.
