The effect of labor unions on capital markets: Evidence from seasoned equity offerings

This paper examines the impacts of labor unions on the market reaction to firms' equity financing decisions (i.e., seasoned equity offerings; SEOs), suggesting that issuers' strategic disclosure in the face of pressure from labor unions impacts investor's perception of the firm value. Using a sample of U.S. SEO issuers between 2001 and 2015, we find that labor unions have a negative effect on SEO issuers' announcement return and are associated with lower SEO underpricing at the offer date compared to non-unionized issuers. These results suggest the market's adverse reactions towards SEO events of unionized issuers, supporting the signaling perspective. Significantly negative responses surrounding announcements support investors' suspicion about the potential misuse of SEO proceeds under the pressure of labor unions. The relatively low underpricing (i.e., lower offering date returns) of unionized issuers also reflects the economic consequences of firms fostering a pessimistic corporate information environment to gain bargaining power against labor unions. Additional analyses reveal that firms only exhibit such strategic disclosure in response to union pressure when they are in sound health (not a target for mergers and acquisitions) and when managers' compensation is not heavily affected by depressed stock prices. We also find that the negative responses to unionized firms' SEO announcements and offerings disappear during the global financial crisis, especially for firms that rely heavily on debt financing. Altogether, these results suggest that investors incorporate union-induced strategic disclosure into their decision-making and respond to such information based on market and firm conditions. Our findings are robust after controlling for SEO peer effects and firms' prior performance.