Tutorial 3:Discuss how capital structure choice could influence a firm’s bargaining with organized labor. Flashcards
How could a firm’s capital structure choice influence its bargaining position with organised labour unions?
FIRMS CAN STRATEGICALLY USE DEBT FINANCING TO INCREASE THEIR BARGAINING POSITION WITH WORKERS –> ‘commitment feature of debt’ suggests debt can help alleviate FCF agency problems by restricting managers from wastefully spending excess cash to align manager-shareholder interests (disciplinary effect) —> because maintaining high levels of corporate liquidity can encourage workers to raise their wage demands, a leveraged firm can actively seek to reduce its liquidity by spending existing cash flows on its debt obligations to avoid paying higher wages –> signals financial constraints that make it harder to meet union demands & deter further wage demands –> reduced managerial flexibility & discretion —> collective bargaining leads firms to adopt a leveraged capital structure, making them more vulnerable to -ve cash flow shocks to meet debt obligations (cash flows would typically be held as insurance against such -ve shocks) –> +ve corr between union bargaining power & firms’ financial leverage.
