Bargaining and Debt Structure
|Speaker:||Alessio Piccolo, Kelley School of Business, Indiana University|
|Date: ||Wednesday 24 June 2020|
|Time: ||15:00 - 16:30|
Conventional wisdom is that leverage improves a firm's position when bargaining with employees, by pushing money off the negotiation table. In a dynamic model of the firm-employee negotiation, we show the opposite can be true. Leverage and shorter debt maturity reduce the firm's ability to withstand long strikes. If workers lead the negotiation when the firm approaches financial distress, this reduced ability weakens the shareholders’ bargaining position. We show that, in response to an exogenous increase in workers’ bargaining power, shareholders may increase or reduce leverage but always increase maturity. Using both industry-level and firm-level data on union coverage to capture changes in employees' bargaining power, we find evidence consistent with these theoretical predictions. Both our theoretical and empirical results indicate that firms respond to powerful employees by increasing their financial resiliency to long negotiations and strikes.