Organized Labor and the Cost of Debt: Evidence from Union Votes

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Murillo Campello, Cornell University, National Bureau of Economic Research (NBER); Janet Gao, Indiana University – Kelley School of Business; Jiaping Qiu, McMaster University – Michael G. DeGroote School of Business; Yue Zhang, McMaster University

Despite their declining prominence, unions still shape human capital participation in corporate activity. Of the largest 100 industrial firms in the U.S. today, 33 have a unionized labor force, with most of their unions formed in the last 20 years. Unions are meant to enhance workers’ bargaining power in negotiating contracts governing benefits such as wages, health care, and pension funding. Arguably, these pecuniary benefits are less important than concerns such as job security and career development. Those non-contractual interests are most endangered when firms go bankrupt. To protect their members, unions have become active parties in legal proceedings under Chapter 11. Not surprisingly, their overriding goal in those proceedings has been that of securing job preservation.

Unionization assigns extraordinary rights to workers in bankruptcy. Critically, the shift to workers’ bargaining power can be detrimental to other corporate creditors. Building on these insights, our paper examines the effect of unionization on unsecured creditors by studying the price reactions of publicly-traded bonds to labor union elections. We do so using detailed election data from the National Labor Relations Board. Comparing closely-won and closely-lost union elections, we find that union wins lead to significant losses in bond values. Interestingly enough, they do not lead to poorer firm performance or higher default risk. We show that unionization is associated with longer proceedings in bankruptcy court, more bankruptcy emergences and refilings, and higher bankruptcy fees and expenses, all of which aggravate bondholders’ losses. Simply put, unionization bring losses to corporate creditors by way of increasing bankruptcy costs, but without increasing the likelihood that firms go into bankruptcy in the first place.

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