Labor unions and loan contracts

ABSTRACT

This paper investigates the relation between labor unions and loan contracting. We find that firms in more unionized industries tend to have lower loan spreads, longer maturity, a lower likelihood of security requirement, fewer and less strict loan covenants, and fewer performance- based covenants. Additionally, using firm-level union election data, we do not find lower loan spreads or longer maturity in unionized firms, but we show that bank loans to unionized firms are less likely to require security, have fewer and less strict loan covenants, and fewer performance-based covenants. While the results on loan spreads are mixed, we find consistent evidence that unionization has significant effect on loan covenants with industry and firm level unionization data as well as the instrument variable analysis. Labor unions’ risk preference is similar to that of creditors. Therefore, it helps align the interests between banks and labor unions, thus reducing the cost of bank loans in terms of loan covenants.

KEYWORDS:

• Labor unions
• union election
• bank loans
• loan covenants

JEL CLASSIFICATIONS:

• G31
• G32
• J51

Acknowledgements

We would like to thank seminar participants at the 2017 Southern Finance Association Meetings, Peking University, Southwestern University of Finance and Economics, Zhejiang University for their valuable comments and suggestions. All errors are our own.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 For example, Matsa (2010); Connolly, Hirsch, and Hirschey (1986); Klasa, Maxwell, and Ortiz-Molina (2009); Bradley, Kim, and Tian (2017).

Additional information

Funding

Zhang acknowledges financial support from the Fundamental Research Funds for Central Universities [grant number 220110004005040122]. Li acknowledges financial support from National Social Science Foundation of China [grant number 18BJY250].