Capital Structure as a Strategic Variable: Evidence from Collective Bargaining

  • Author(s): DAVID A. MATSA
  • Published: May 07, 2010
  • Pages: 1197-1232
  • DOI: 10.1111/j.1540-6261.2010.01565.x


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.

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