Graduation Year
2024
Date of Submission
12-2023
Document Type
Open Access Senior Thesis
Award
Robert Day School Prize for Best Senior Thesis in Economics and Finance
Degree Name
Bachelor of Arts
Department
Economics
Reader 1
Serkan Ozbeklik
Terms of Use & License Information
Rights Information
© 2023 Rachana Muvvala
Abstract
I study the impact of unions on firms’ financial decision making by exploring their capital structure, specifically leverage. I test two opposing hypotheses to understand the relationship between unions and firms’ leverage: (1) the bargaining hypothesis which suggests that firms use higher leverage as a bargaining device with unions, and (2) the crowding-out hypothesis which suggests that firms have lower leverage because unions crowd out their debt capacity due to their perceived riskiness. Focusing on the 2007 to 2022 period, I examine right-to-work (RTW) laws, since they are exogenous shocks that decrease union power in five different states. Then, I compare the changes in firms’ leverage between RTW and non-RTW states using an event study differences-in-differences model. Overall, I find that the average firm in a RTW state decreases leverage by 1.2 percentage points relative to non-RTW states and takes three or more years to enact changes. More highly unionized firms like manufacturing firms react more aggressively and promptly, as they decrease leverage by 1.6 percentage points and start doing so two years after RTW laws’ passage. These results support the bargaining hypothesis — as unions weaken, firms reduce their leverage because they no longer need as much of it as a negotiation tool.
Recommended Citation
Muvvala, Rachana, "Unions’ Impact on Firms’ Financial Decision Making: A Look at Right-to-Work Laws and their Impact on Firms’ Leverage Decisions" (2024). CMC Senior Theses. 3432.
https://scholarship.claremont.edu/cmc_theses/3432
Included in
Collective Bargaining Commons, Corporate Finance Commons, Finance and Financial Management Commons, Unions Commons
