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Labor Unions, Operating Flexibility, and the Cost of Equity

Published online by Cambridge University Press:  26 October 2010

Huafeng Jason Chen
Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC V6T 1Z2, Canada.
Marcin Kacperczyk
Sauder School of Business, University of British Columbia, 2053 Main Mall, Vancouver, BC V6T 1Z2, Canada.
Hernán Ortiz-Molina
Stern School of Business, New York University, 44 W. 4th St., Ste. 9-78, New York, NY 10012 and National Bureau of Economic Research.


We study whether the constraints on firms’ operations imposed by labor unions affect firms’ costs of equity. The cost of equity is significantly higher for firms in more unionized industries. This effect holds after controlling for several industry and firm characteristics, is robust to endogeneity concerns, and is not driven by omitted variables. Moreover, the unionization premium is stronger when unions face a more favorable bargaining environment and is highly countercyclical. Unionization is also positively related to various measures of operating leverage. Our findings suggest that labor unions increase firms’ costs of equity by decreasing firms’ operating flexibility.

Research Articles
Copyright © Michael G. Foster School of Business, University of Washington 2011

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