Organized Labor and Debt Contracting: Firm-Level Evidence from Collective Bargaining (Job Market Paper)

This paper employs a novel, firm-level collective bargaining dataset, which is extracted directly from 10-K filings, to investigate the effect of labor, as an important stakeholder of a firm, on debt contracting. I find that employees’ collective bargaining power is positively associated with loan spreads despite the possible alignment of interests between employees and debt holders. Prior literature suggests that unionized firms have higher information asymmetry. I provide evidence that firms with strong organized labor are able to attenuate the cost of information asymmetry by providing banks with information that was deliberately withheld from the public markets. Further, I show that organized labor influences the structure of syndicated loans because higher information asymmetry induces lead lenders to form more concentrated syndicates. Finally, I find that the positive relationship between collective bargaining power and financial leverage that is documented in prior research is driven by firms’ incentives to withhold information from labor unions. Overall, this study demonstrates that firms’ incentives to maintain information asymmetry with organized labor have significant influence on firms’ debt contracting decisions and outcomes and that firm-level collective bargaining data is superior to industry-level data in explaining firm-specific contractual outcomes. JEL Classifications: M41; G32; D82; J50