How Do Corporate Liquidity and Repurchase Policies Respond to Unionization at Major Customer Firms? (Job Market Paper)
By Annie Le and Anup Agrawal
Abstract:
We examine whether firms respond to labor unionization at major customer firms by changing their financial policies. We employ the regression discontinuity design (RDD) approach to identify the causal effects of unionization of a customer on its supplier’s cash holdings and stock repurchases. We empirically test for two competing and opposite effects: shielding vs. specific investment. In the full sample, dependent suppliers respond by reducing their cash holdings by 3% of total assets and increasing stock repurchases by 0.5% of total assets. These effects are even larger when the customer (1) is more important to the supplier, (2) has greater market power, (3) is located near the supplier, and (4) has had a shorter business relationship with the supplier. These effects generally reverse for suppliers with greater specific investment or longer relationship duration. Our findings suggest that overall, the shielding effect dominates: dependent suppliers reduce cash holdings and increase repurchases to shield their firm assets from rent-seeking behaviors by newly unionized customers. But for suppliers with greater specific investment or longer relationship with the customers, the specific investment effect dominates: suppliers increase their financial flexibility to preserve customers’ relationship-specific investments.
Presentations: AFA 2024 (Poster), FMA 2023, University of Maine, University of Alabama.
Dividend Policy After Unionization at Major Customer Firms
By Annie Le and Hoang Nguyen
Abstract: We examine whether labor unionization at major customer firms affects suppliers’ dividend payout policies. We empirically test for two competing effects: cost stickiness (i.e., the asymmetry in cost responses to decreases vs. increases in sales) vs. shielding. Under the cost stickiness effect, following labor unionization at major customers, suppliers may face higher cost stickiness due to their newly unionized customer’s operating inflexibility. This may decrease suppliers’ future free cash flows, resulting in a reduction in their dividend payout. Under the shielding effect, dependent suppliers may increase their dividend payout to protect firm assets from rent-seeking behavior by their newly unionized major customers. We employ the regression discontinuity design (RDD) approach to identify the causal effects of unionization of a customer on its supplier’s payout policies. In the full sample, dependent suppliers respond by reducing their total dividends by 0.7% of total assets and decreasing their dividend yield by 1.9%. These effects are even larger when the customer (1) is more important to the supplier, (2) has greater market power, and (3) has had a long-term business relationship with the supplier, or the supplier has (1) low market power, (2) high specific investments, and (3) high ex ante cost stickiness. We also find evidence of increased ex post cost stickiness for the dependent suppliers after labor unionization at their major customers. The findings suggest that overall, the cost stickiness effect dominates: following customer unionization, dependent suppliers reduce their dividend payout policies due to their higher cost stickiness.
Presentations: AEA 2024 (Poster), University of Alabama.
Does Labor Unionization at Major Customer Firms Harm Corporate Innovation?
Abstract: I examine whether labor unionization at major customer firms affects suppliers’ innovation using the regression discontinuity design (RDD) approach. I find that two years post-unionization at major customers, the dependent suppliers reduce their innovation input measured by RD spending by 2.6% in the first year and 2.5% in the second year. However, the decline in RD expenditure does not result in a significant reduction in patent quantity and quality. In fact, the average effect of labor unionization on supplier innovation depends on the nature of the relationship between customers and suppliers. The negative effect on suppliers’ RD spending is even larger when either customers (1) have lower market power, (2) locate near suppliers; or suppliers (1) have higher market power, (2) a more diverse innovation portfolio. Suppliers’ innovation quality seems to be increased when they (1) have lower market power, (2) locate near their customers, and (3) have a less diverse innovation portfolio.