Does Capital Structure Affect the Behavior of Nonfinancial Stakeholders? An Empirical Investigation into Leverage and Union Strikes

We use contract negotiation data to study how leverage affects the interaction between firms and an important nonfinancial stakeholder, labor unions. Consistent with the idea that leverage diminishes the bargaining position of labor, we find that unions are less likely to strike when a firm has high leverage or increases leverage prior to a contract negotiation. We also find large leverage increases after a strike, consistent with the idea that firms intentionally use leverage to improve their bargaining position. This poststrike increase in leverage is particularly pronounced when the union wins the strike. Moreover, we do not find any clear indication that such increases in leverage are linked to changes in investments. In addition, firms that experience a strike subsequently invest more internationally and in right-to-work states where union are afforded fewer legal protections, and they increase their disposal of production units that are located in states where strikes have occurred.

This paper was accepted by Brad Barber, finance.