ABSTRACT
We investigate whether and how unionization affects a firm’s use of nonbank loans. Based on a comprehensive sample, we find that unionization is significantly and positively related to a firm’s likelihood of using nonbank loans. We also find that the effect is more pronounced in firms with lower information asymmetry. Overall, the results are consistent with the notion that unionized firms are more likely to use nonbank loans to reduce the proprietary costs of information disclosure. The findings also contribute to a better understanding of why firms choose expensive nonbank loans.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1 The modern literature on financial intermediation has established banks as primarily relationship lenders. Banks develop close relationships with borrowers over time. Such relationships facilitate monitoring and screening, helps overcome problems of asymmetric information, and thus are a prime source of an incumbent bank’s comparative advantage over de novo lenders (Boot Citation2000; Bharath, Dahiya, Saunders, and Srinivasan, Citation2007).
2 Our nonbank lender identification strategy follows Lim, Minton, and Weisbach (Citation2014), who classify any lender as a nonbank lender if the lender is not a bank. As such, non-bank lenders include ‘hedge funds, private equity funds, mutual funds, pension funds and endowments, insurance companies, and finance companies’ (Lim, Minton, and Weisbach Citation2014, 48). In our sample, pension funds, insurance companies, and mutual funds account for less than 1% of the total observations. Excluding these observations does not alter our results.
3 We note that there are significant differences in unionization systems between the U.S. and most Continental European countries (e.g. Belgium, France, Germany, Italy, and Spain). In the U.S., workers need to be union members to be covered by collective labour agreements, while in Continental Europe, the vast majority of workers, whether they are union members or not, are covered by such agreements (Bryson Citation2007). In addition, in the U.S., union collective bargaining occurs at company or workplace level; in Continental Europe, it could happen at national, sectoral, regional, or company level, with many workers covered by bargaining occurring at more than one level.