Shadow Union in Local Labor Markets and Capital Structure

This paper identifies an externality of a firm's unionization that affects the capital structure decisions of other, non-unionized firms within a local labor market. We find that union victory in a firm leads non-unionized firms to increase their market leverage ratio 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. This is consistent with a heightened threat of unionization in the local labor market following shadow union organizing. We confirm that this threat is credible enough to shape corporate financing decisions because unionization leads to an increase in wages in the local labor market. The findings suggest that a shadow labor market institution creates a strategic incentive for non-unionized firms to use less conservative financial policies to combat the union threat