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1 results

  • Labor Unions, Operating Flexibility, and the Cost ofEquity

  • Huafeng Jason Chen, Marcin Kacperczyk, Hernán Ortiz-Molina
  • Journal:
    Journal of Financial and Quantitative Analysis / Volume 46 / Issue 1 / February 2011
    Published online by Cambridge University Press:
    26 October 2010, pp. 25-58
    Print publication:
    February 2011

  • We study whether the constraints on firms’ operations imposed by laborunions affect firms’ costs of equity. The cost of equity issignificantly higher for firms in more unionized industries. This effect holdsafter controlling for several industry and firm characteristics, is robust toendogeneity concerns, and is not driven by omitted variables. Moreover, theunionization premium is stronger when unions face a more favorable bargainingenvironment and is highly countercyclical. Unionization is also positivelyrelated to various measures of operating leverage. Our findings suggest thatlabor unions increase firms’ costs of equity by decreasingfirms’ operating flexibility.