Union and Debt: Evidence from Chinese Private Firms

Abstract

Do unions really matter in China? Using a dataset containing more than 110 thousand Chinese private manufacturing firms, this paper is the first attempt to examine how unions' bargaining power affects firms' capital structures. We find that: (1) the firms' debt levels are often positively associated with their unions' bargaining powers; (2) when a firm is in financial distress, the management is more likely to issue more debt to strengthen its bargaining power against the union and increase its residual income; (3) compared with long-term debt, short-term debt is a better option for the management to increase its bargaining power and residual income. Our research indicates that the unions of private Chinese firms are an important policy instrument for the management rather than useless decorations, which provides valuable insights for us to understand the employee–employer relations and firms' capital structures in emerging economies.

Key Words:

• China
• firm
• union
• capital structure
• debt

Jel Classifications:

• G32
• J51
• J53
• D86

Notes

1. For example, Ge (2014) finds that unions of Chinese firms have significant positive influence on average wage, welfare level, and human capital investment. Yao and Zhong (2013) find that unions significantly increase employees’ average hourly wage using census data of 1268 firms in two cities in China. Utilizing provincial-level data during 1994–2008, Budd et al. (2014) suggest that union density does not affect average wage levels, but affects aggregate productivity and output. Wang and Nie (2012) find that unions have significantly positive influences on the coverage of pensions, medical, accident, and unemployment insurance of employees. Similar findings include Lu (2010).

2. The Trade Union Law Article 6 specifies that “the basic function and duty of the trade unions is to safeguard the legal rights and interests of the employees. While upholding the overall rights and interests of the whole nation, trade unions shall, at the same time, represent and safeguard the rights and interests of employees”.

3. Please refer to Shi (2002) and Liu (2010) for the history evolution, organizational framework, and detailed functions.

4. Chinese Industrial Enterprises Database includes the Chinese economic census data of 2004.

5. Bronars et al. (1991) use collective bargaining as the proxy for unions’ bargaining power. However, we don't have any collective bargaining variable in our dataset, so we use union dummy or union coverage. The reason is as follows. Because according to the Union Law, Chinese unions have the right to represent employees in negotiation and collective bargaining with the employer (Chapter 1, Article 6), and the right to assist and provide guidance to employees in signing labor contracts with an enterprise (Chapter 3, Article 20) (Budd et al., 2014). The Labor Contract Law further confirms unions' above rights. Actually, Ge (2014) indicates that Chinese labor unions significantly improve employees’ wage and nonwage compensation.

6. According to Law of the People's Republic of China on Enterprise Bankruptcy, one of the preconditions for a firm to enter bankruptcy proceeding is that the firm is unable to repay debts that are due. The debts that are due often take the form of interest expenses, which mainly come from a firm's operating cash flow.

7. Many researches use the index of Fan et al. (2010) to measure differences across provinces in China, for example, Ang et al. (2014).

8. Acemoglu and Robinson (2008) distinguish de jure power and de facto power, and discuss their transformations.

9. In column (3), the coefficient of union dummy is actually its coefficient when financial distress dummy is equal to 0. Therefore, although it is not significant, our main results hold.

10. We leave out the results in this paper due to limited space.

Additional information

Funding

This work was supported by Beijing Natural Science Foundation [No. 9154025], National Social Science Foundation of China [No. 15CJL019].