Organized Labor and the Cost of Debt: Evidence from Union Votes

Abstract

Arguments that worker unionization leads to changes in productivity, employment, or business survival find little support in the literature. While unionization may have limited impact in good states, unionized workers are entitled to special treatment in bankruptcy court. This shift in bargaining power can be detrimental to other corporate stakeholders in default states, with senior, unsecured creditors standing to lose the most. We gather data on union elections covering several decades and employ a regression discontinuity design to identify the effect of worker unionization on bondholders' wealth. Closely-won union elections lead to significant losses to bond values but do not lead to poorer firm performance or higher default risk. Critically, unionization is associated with longer proceedings in bankruptcy court, with more bankruptcy emergences and subsequent refilings, and with higher fees and expenses paid to lawyers and financial experts in court. All of these costs diminish corporate asset values, aggravating bondholders' losses. The value effect of unionization is weaker in states where unions have been undermined by right-to-work laws.