Capital Structure as a Strategic Variable: Evidence from Collective Bargaining



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    • David Matsa is at the Kellogg School of Management, Northwestern University. This paper is based on Chapter 1 of my MIT dissertation. Nancy Rose and Joshua Angrist provided invaluable guidance and advice. I am grateful for helpful comments from Glenn Ellison, Dirk Jenter, Jean Tirole, Daniel Bergstresser, Henry Farber, Mike Fischman, Todd Gormley, John Graham (the co-editor), Campbell Harvey (the editor), Andrew Hertzberg, Dominique Olie Lauga, Mitchell Petersen, Michael Piore, Joshua Rauh, Paola Sapienza, David Scharfstein, Antoinette Schoar, Amir Sufi, an anonymous referee, members of various MIT lunch groups, and seminar participants at numerous institutions. I thank Richard Freeman and Barry Hirsch for both sharing firm-level estimates of collective bargaining coverage and providing useful suggestions.


I analyze the strategic use of debt financing to improve a firm's bargaining position with an important supplier—organized labor. Because maintaining high levels of corporate liquidity can encourage workers to raise their wage demands, a firm with external finance constraints has an incentive to use the cash flow demands of debt service to improve its bargaining position with workers. Using both firm-level collective bargaining coverage and state changes in labor laws to identify changes in union bargaining power, I show that strategic incentives from union bargaining appear to have a substantial impact on corporate financing decisions.