Labor unions, bargaining power and corporate bond yield spreads: Structural credit model perspectives

Labor Unions and Management’s Incentive to Signal a Negative Outlook*

“…Finally, the results complement evidence from a growing literature that finds that managers engage in strategic actions to mitigate unions’ negotiation leverage over the firm. For example, recent articles illustrate that firms choose to finance with debt (Matsa 2010) and hold lower cash levels (Klasa, Maxwell, and Ortiz‐Molina 2009; Chen, Chen, and Liao 2011) because maintaining higher levels of corporate liquidity can increase employee wage demands. Building on this evidence, my results suggest that firms also strategically augment their reporting strategy in order to mitigate employee negotiation leverage.…”

Employee treatment and its implications for bondholders

“…Firms with fewer analysts following and higher analyst forecasting dispersion have greater information uncertainty and thus have higher yield spreads (Lu et al, 2010). We control for union power because Chen et al (2011) and Chen et al (2012) document a union effect on yield spreads. We follow Klasa, Maxwell, and Ortiz-Molina (2009) and use industrial unionization rates to proxy for union strength.…”

“…The literature suggests that time-series variations of firm characteristics such as equity return volatility (Campbell & Taksler, 2003), cash-flow volatility (Tang & Yan, 2010), volatility of union strength (Chen et al, 2011), and volatility of production efficiency (Chen et al, 2014) tend to contribute to firmspecific risks and higher yield spreads. When the volatilities of these firm characteristics are high, bondholders are less able to precisely assess a firm's asset value or its distribution and may consider the bond riskier.…”

“…The determination of corporate bond yields is becoming an increasingly important issue in credit risk management because of the rapid growth of credit and credit derivative markets.For example, the amount of new corporate bond issuance in the United States has risen from $587 billion in 2000 to $1,486 billion in 2014, which is 8.5 times the amount of new stock issuance, $175 billion in 2014 (data source: http://www.federalreserve.gov/econresdata/releases/corpsecure/current.htm). Recent studies document that a firm's idiosyncratic risk resulting from firm characteristics or activities plays a critical role in explaining corporate bond yield spreads.See, e.g., Warga (1992) for the effect of liquidity; Collin-Dufresne, Goldstein, and Martin (2001) for financial leverage; Campbell and Taksler (2003) for equity volatility; Yu (2005) for accounting disclosure quality; Lu, Chen, and Liao (2010), Güntay and Hackbarth (2010), and Chen et al (2014) for information uncertainty; and Chen, Chen, and Liao (2011) and Chen, Kacperczyk, and Ortiz-Molina (2012) for labor unions. This paper joins this stream of research by investigating the implications of employee relations for the welfare of debtholders.…”

The impact of labor unionization on monitoring costs

“…Unionization enables employees to advance their claims to better wages, hours and working conditions and to extract rents (i.e., wage premiums) (Bilginsoy, 2013;Hallock & Klein, 2016;Panos & Theodossiou, 2013;Rios-Avila & Hirsch, 2014;West, 2015) through collective bargaining, industrial action and activism (Agrawal, 2012;Chen, Chen, & Liao, 2011b;Chyz, Leung, Li, & Rui, 2013;Faleye, Mehrotra, & Morck, 2006). However, union priorities and actions may cause considerable adversity, known as a "moral hazard", which can harm the firm (Doucouliagos & Laroche, 2009).…”