Shadow Union in Local Labor Markets and Capital Structure

Abstract

This paper identifies an externality of a firm’s unionization that affects the capital structure decisions of non-unionized firms within a local labor market. We find that a union victory leads non-unionized firms to increase market leverage ratios by 0.9 to 1.3 percentage points. This "shadow union" effect is more pronounced when the probability of unionization rises in a larger margin and firms face higher union rents conditional on being unionized. The threat is credible enough to shape corporate financing decisions: shadow unions raise the wages of employees and increase the likelihood of subsequent union victories in the relevant labor market.