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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 please do not quote!. Review Motivation Proposed story Data Union and repurchase

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how collective bargaining with labor union may affect firms share repurchase decision

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please do not quote!

review on union studies

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)).
review on union studies1

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).
review on repurchase studies

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).
union and corporate policies

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)
firm performance of repurchases for stakeholders

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).
firm performance of repurchases for stakeholders1

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?
a research map

Review

Motivation

Proposed story

Data

Union and repurchase

More evidence

M&A and ESOP

Conclusion

A research map

CCW (2011)

a recent case

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
purpose of this paper

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.
how does union relate to buyback

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.
how does union relate to buyback1

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.
a quick glance

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.
slide14

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.
summary statistics

Review

Motivation

Proposed story

Data

Union and repurchase

More evidence

M&A and ESOP

Conclusion

Summary Statistics
tobit regression analyses

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.
some robustness checks

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.
instrument variable regression

Review

Motivation

Proposed story

Data

Union and repurchase

More evidence

M&A and ESOP

Conclusion

Instrument variable regression
earnings to repurchase sensitivity

Review

Motivation

Proposed story

Data

Union and repurchase

More evidence

M&A and ESOP

Conclusion

Earnings to repurchase sensitivity
more evidence on the negative union effect on repurchases

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.
unions with more bargaining power

Review

Motivation

Proposed story

Data

Union and repurchase

More evidence

M&A and ESOP

Conclusion

Unions with more bargaining power
what happens if unionized firm insists on repurchasing

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
strike probability

Review

Motivation

Proposed story

Data

Union and repurchase

More evidence

M&A and ESOP

Conclusion

Strike probability
long run stock return

Review

Motivation

Proposed story

Data

Union and repurchase

More evidence

M&A and ESOP

Conclusion

Long-run stock return
two exceptions for negative union effect on repurchases

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).
role of m a

Review

Motivation

Proposed story

Data

Union and repurchase

More evidence

M&A and ESOP

Conclusion

Role of M&A
role of employee stock option

Review

Motivation

Proposed story

Data

Union and repurchase

More evidence

M&A and ESOP

Conclusion

Role of employee stock option
union and dividend policy

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.
tobit regression analyses of dividend increases

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)
conclusion

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.
conclusion1

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