Capital Structure and Reversible Bargaining Tools: Evidence from Union-Sponsored Shareholder Proposals

We model and analyze the interplay of capital structure and labor union reversible bargaining tools (such as union-sponsored shareholder proposals). Unions counter firms’ ex-post strategic use of debt by employing bargaining tools that can be reversed depending on firm performance. Firms adjust debt ex ante to make underinvestment a credible threat if the bargaining tools are not reversed. The use of reversible bargaining tools is negatively affected by debt, decreases for riskier firms when the state of the economy is low, and reduces the profits of safer firms. Consistently, we find that union-sponsored shareholder proposals are negatively related to leverage, decrease for riskier firms during the 2008-2009 financial crisis, and are negatively associated with the profitability of safer firms.