The Effect of Two-Tier Collective Bargaining Agreements on Shareholder Equity

Abstract

This study uses an event-time methodology to examine the impact of two-tier agreements on shareholder equity from 1981 through 1986. Following announcements of two-tier agreements, about half of the firms in the sample had negative abnormal returns (returns with values below the expected market returns) and half had positive abnormal returns. Because the positive returns exceeded the negative returns in absolute value, however, there was a statistically significant increase in mean firm value. The abnormal returns averaged between + 2% and + 4% over a 10-to 12-week period following the announcement, a figure that approximately equals the transactions cost of a stock purchase. The authors speculate that this rather low average gain may help explain the marked decline of new two-tier agreements during the latter half of the 1980s. DURING the early and mid-1980s there was a substantial increase in the number of two-tier wage provisions in collective bargaining agreements. Corporate managers, faced with deregulation, recession, increasing foreign competition, and greater pressure from shareholders, implemented these provisions as part of their effort to reduce unit labor costs. Two-tier wage agreements (defined as wage provisions in which new hires are paid at lower rates than senior workers in

The Capital Market Response to Wage Negotiations in the Airlines

“…Thus, this suggests that our results may not generalize to concessions in other industries. Other studies, however, have also produced statistically significant, positive, but rather small returns for the announcement of concessions (Becker and Olson, 1987) and two-tier agreements (Thomas and Kleiner, 1992). In these previous studies, however, a significant number of firms exhibited negative returns suggesting that the market response we found to airline concessions is consistent with the results of previous studies.…”

“…While the market response to initial two-tier agreements appears somewhat stronger than for subsequent agreements, neither MCPE is statistically significant. The results are equivocal in the sense that the preannouncement (days -20 to -2) declines in MCPEs are Capital Market Response to Airline Wage Negotiations I 21 1 followed by postannouncement gains for both initial and subsequent agreements.12 The market may anticipate the bargaining outcome imperfectly, particularly for initial two-tier agreements where we observe a 4.46 percent l2 These results are similar to those of Thomas and Kleiner (1992) who found that two-tier firms were just as likely to have positive or negative abnormal returns following the announcement of the agreement. However, in contrast to our insignificant results, they also found that on average two-tier agreements did modestly add firm value.…”

“…la Becker (1987) and Thomas and Kleiner (1992) estimate cumulative average residuals (CARs) that are standardized by the residual variance. Our mean cumulative prediction errors (MCPEs) are identical to the above authors' CARs.…”

“…* Becker and Olson (1987) based their conclusions on the work of Abowd (1987), who examined over 4,000 labor contracts on file with the Bureau of National Affairs (BNA) from 1976-84, and the findings of Becker (1987), who also used 70 BNA contracts that were referred to as concessionary. Further support for redistributive effects was found by Thomas and Kleiner (1992), who also used event study methodology using BNA and Bureau of Labor Statistics records of contract settlements to identify two-tier wage agreements. 206 / STEVEN L. THOMAS, DENNIS OFFICER, AND NANCY BROWN JOHNSON hire large numbers of employees.…”

“…206 / STEVEN L. THOMAS, DENNIS OFFICER, AND NANCY BROWN JOHNSON hire large numbers of employees. Thus, the firms most in need of cost relief benefit least from two-tier contracts.3 Additionally, because lower initial wages may inhibit two-tier firms' ability to attract efficient employees, reduced productivity may mitigate the cost saving^.^ Finally, equityrelated problems brought about by the two-tier plan's introduction may lower job satisfaction and decrease work effort among lower-tier employees (see Thomas and Kleiner, 1992, for a review). However, others have found that pay satisfaction is higher among those on the lower tier relative to the high tier (Cappelli and Sherer, 1990).…”