The literature on agency costs has established that the introduction of outside equity results in conflicts betl.een ne1,7 mmers and management that lO1,7ers the value of the firm. In contrast, this paper, by focusing on management-labor conflicts, demonstrates that the value of the firm can be increased by the introduction of outside equity. We obtain this result by sho1,7ing that the bargaining position of the o1,7ner-manager is enhanced 1,7hen outside equity is increased. As a result, 1,7orkers with firm-specific skills are persuaded to accept a lm.er 1,7age, and hence the value of the firm increases.