Labor Unions and the Cost of Debt

Abstract

We examine the impact of labor unions on the cost of corporate debt. Using a dataset of union certification elections, we find that unionization is associated with a 30 basis point increase in yield spreads on corporate bonds. The positive effect of unionization on bond spreads is more pronounced for small firms, firms with high leverage, firms with high operating risk, and firms with greater credit risk. We also find that the effect of unionization on bond spreads is stronger for firms located in states without right-to-work laws, firms in non-manufacturing industries, firms in industries with low unionization rates, and firms with weak shareholder rights. Overall, our evidence suggests that unionization increases a firm’s cost of debt, especially for high credit risk firms and firms in which unions are expected to have high bargaining power. Our findings suggest that policies designed to enhance union strength, such as the recently-proposed Employee Free Choice Act, would have negative repercussions for bondholder wealth and the cost of debt. We estimate that repealing right-to-work laws would raise the cost of debt by 20 basis points for unionized firms.