How collective bargaining with labor union may affect firms’ share repurchase decision ?

1. How collective bargaining with labor union may affect firms’ share repurchase decision? Sheng-Syan Chen, Yan-Shing Chen and Yanzhi Wang Presented at National Taiwan University Very preliminary! please do not quote!

2. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Review on union studies • Unionized labor has significant impact on corporate finance policies because of the potential conflict of interest between union and management or shareholders. • Unions could be viewed as a monopoly power of labor supply, it bargains with employers to pursue better wage, benefits, working environment and job security. • However, unionization generally has no significant effect on productivity improvement, better employment conditions would translate into higher production cost and lower shareholder value (See a survey paper of Addison and Hirsch (1989)).

3. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Review on union studies • In a bargaining table, the union demand is positively related to firm’s financial condition. • Union tends to demand more when firms enjoy greater profit owning to monopoly power (Card, 1990; Jimenez-Martin, 1999). • On the other hand, it is easier for firms to ask for union concession when firms are doing poor from union’s view. • Firms may deliberately maintain information asymmetry with outsiders to strengthen bargaining power with unions (Hiliary, 2006). • firms facing strong union tend to enhance bargaining power by strategically using more leverage (Bronars and Deere, 1991 and Matsa, 2010). • Firms may hold less cash to gain bargaining advantages over labor unions (Klasa, Maxwell and Ortiz-Molina, 2009; Chen, Kacperczyk, and Ortix-Molina, 2011).

4. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Review on repurchase studies • Firms buy back shares for following reasons. • Signaling (Vermaelen, 1981; Ikenberry, Lakonishok and Vermaelen, 1995; Chan, Ikenberry and Lee, 2004) • Free cash flow distribution (Jensen, 1986; Grullon and Michaely, 2004) • Dividend substitution (Grullon and Michaely, 2002) • Mimicking (Massa, Rehman and Vermaelen, 2007) • Antitakeover (Dittmar, 2000; Billett and Xue, 2007) • Preparation for employee stock option (Kahle, 2004) • Misleading and EPS boost-up (Hribar, Jenkins and Johnson, 2006; Chan, Ikenberry, Lee and Wang, 2010) • Repurchases are flexible in terms of repurchased ratio and actual buyback (not disclosed in financial statement before 2004).

5. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Union and corporate policies • Union and capital structure • Empirical evidences show firms facing strong union tend to enhance bargaining power by strategically using more leverage (Bronars and Deere, 1991 and Matsa, 2010). • Union and payout policy (Our paper) • We focus on the union effect on share repurchases because of the popularity of repurchases in recent decades. • The dollar amount spent on repurchases has exceeded dividend since 1998 and firms that pay dividend only are largely distinct now (see, e.g., Grullon and Michaely, 2002; and Skinner, 2008)

6. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Firm performance of repurchases for stakeholders • Repurchase and shareholders • Repurchases are associated with better firm performance and improved shareholder wealth (Vermaelen, 1981; Ikenberry, Lakonishok and Vermaelen, 1995) • Repurchase and bondholders • The buyback involves in the wealth effects between shareholders and bondholders where the repurchase leads to the decrease in the bond price (Maxwell and Stephens, 2003).

7. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Firm performance of repurchases for stakeholders • Repurchase and Industry rivals • Firms may mimic repurchases made by their industry rivals to undo the negative repurchase effect between among competitors (Massa, Rehman and Vermaelen, 2007). This mimicking behavior lower the post-repurchase stock performance of firms. • How about the relation between repurchases and labor unions?

8. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion A research map CCW (2011)

9. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion A recent case • NBC news report that the International Association of Machinists (IAM), an union representing most of Boeing’s machinists, demand a 13% rise in wage, which is far more than what Boeing are willing to offer, when Boeing making record profits, maintaining the share buyback plan and holding record backlogs in 2008. Finally, Boeing turned down union’s demand and was struck by IAM’s workers in Seattle. The strike last 58 days and cause Boeing a lost over 4 billion dollars

10. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Purpose of this paper… • In this paper, we examine the relation between the labor, union and share repurchase. • We use the unionization rate as a proxy variable for the bargaining power of labors (Klasa, Maxwell and Ortiz-Molina, 2009). The unionization rate is the percentage of an industry’s workers that are represented by labor union in the collective bargaining with the firm.

11. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion How does union relate to buyback? • We propose a negative relation between unionization rate and share repurchases • The higher unionization rate of a firm, the more bargaining power the labors have in a bargaining table. • Firm usually buys back shares by cash (Jensen, 1986; Stephens and Weisbach, 1998; Dittmar, 2000). Repurchase firm is also expected to experience improved accounting earnings (Lie, 2005; Gong, Louis and Sun, 2008). • When the unionization rate is high, the firm may deter repurchases to avoid infuriating the labor union because union may ask why not using these resources to improve their employment conditions.

12. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion How does union relate to buyback? • Repurchases lower the collective bargaining power with the firm in the bargaining table. • One possible way for the union to fight back the repurchase firm is labor strike. • No matter the firm is struck or not, repurchase by high unionized firm leads to an unfavorable market reaction.

13. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion A quick glance… • Firms with unionization rate below 5% are most likely to buy back shares. In contrast, firms with unionization rate above 20% are less likely to buy back shares.

14. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Data • Our sample consists of all U.S. firms available in Compustat and Center for Research Security Prices (CRSP) during 1984 to 2007. • We obtain repurchase and acquisition data from Securities Data Company (SDC). Employee stock option information comes from S&P Execucomp database. Industry unionization rate is provided by Barry Hirsch and David Macpherson’s database at www.unionstats.com. • We require those firms to have positive size and book-to-market ratio. We remove low price stocks (price below $3) to avoid extreme skewness in the return estimation. Our final sample includes 99,947 firm-year observations for 13,570 U.S. firms.

15. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Summary Statistics

16. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Tobit regression analyses • Other control variables are included (ROA, size, B/M, prior return, cash dividend, HH, M&A dummy, and year dummies) • A standard deviation decrease in unionization rate yields 0.16% increase in the repurchased ratio and 0.17% increase in the actual buyback ratio.

17. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Some robustness checks • Labor strength is unionization rate multiplying total employees and then divided by total book asset.

18. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Instrument variable regression

19. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Earnings to repurchase sensitivity

20. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion More evidence on the negativeunion effect on repurchases • First, we expect the negative union effect on share repurchase activities should be stronger when unions are associated with greater bargaining power relative to employers. • Proxies for collective bargaining power include: • Right-to-work law (RTW), Democrat Party,segment concentration, excess cash and debt ratio.

21. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Unions with more bargaining power

22. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion What happens if unionized firm insists on repurchasing? • Highly unionized firms that repurchase shares may incur strike • Highly unionized firms that repurchase shares may be followed by poor stock performance • The return is lower because of higher chance of strike • Even the firm is not stuck, the negotiation cost is higher for this firm with repurchase

23. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Strike probability

24. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Long-run stock return

25. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Two exceptions for negativeunion effect on repurchases • Dittmar (2000) suggests that firms may repurchase shares because of multiply motives. • Among these motives, we are curious whether highly unionized firms still avoid repurchases if these buybacks relate the benefits of employees. Two repurchase motives are discussed: one is takeover defense and the other is preparation for employee stock option. • A firm may buy back shares to avoid potential antitakeover (Dittmar, 2000; Billett and Xue, 2007). • A firm could buy back shares as the manner to prevent the share dilution from the exercise of employee stock options (Dittmar, 2000; Kahle, 2002).

26. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Role of M&A

27. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Role of employee stock option

28. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Union and dividend policy • If the union influences the repurchase decision, then it is intuitive to link the union to dividend. • Because the dividend payout ratio tends to be fixed over time, we look at the dividend increase.

29. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Tobit regression analyses of dividend increases • Other control variables are included (ROA, size, B/M, prior return, cash dividend, HH, M&A dummy, and year dummies)

30. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Conclusion • This paper studies how the labor union strength affects the repurchase decision. We argue that a high unionized firm is less likely to buy back shares. • The high unionized firm may not buy back shares to avoid infuriating the powerful union. • This negative relation is robust and not driven from endogenous problem or other reasons. • The firm faced with more powerful unions buys back fewer shares. The firm with more repurchases suffers higher strike threat.

31. Review Motivation Proposed story Data Union and repurchase More evidence M&A and ESOP Conclusion Conclusion • A negative relation between the post-buyback abnormal return and the extent to the unionization is suggested. • Finally, we find that the impact of union on the repurchase decision is reduced if the buyback is associated with the mergers or employee stock options