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Organized labor, corporate governance, and stock price crash risk

Author

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  • Qunfeng Liao
  • Bo Ouyang

Abstract

Purpose - The aim of the paper is to investigate the effect of labor strength on stock price crash risk and related moderating mechanisms. Design/methodology/approach - To examine the relationship between labor unions and stock price crash risk and, more importantly, whether corporate governance moderates this relationship. Ordinary least squares (OLS), two-stage least squares, cross-sectional analyses, industry-level regressions and firm-level regressions are conducted. Findings - The results suggest a negative impact of labor union strength on stock price crash risk. Further analysis suggests strong corporate governance mechanisms may mitigate the increased stock price crash risk in less-unionized firms. Originality/value - Labor unions have a long-term horizon in the firm and have strong incentives to monitor managerial opportunism. However, labor unions may also increase financial reporting opacity and collude with managers to gain bargaining power in labor negotiations. The authors’ finding suggests that labor union strength is negatively associated with stock price crash risk. This finding is consistent with the notion that labor unions curb managerial opportunism in information disclosure, resulting in reduced crash risk. More importantly, the authors find corporate governance mitigates the negative impact of reduced unionization on crash risk, providing empirical support for recent regulatory efforts to strengthen corporate governance to prevent stock market crash.

Suggested Citation

  • Qunfeng Liao & Bo Ouyang, 2017. "Organized labor, corporate governance, and stock price crash risk," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 16(4), pages 424-443, November.
    • Handle: RePEc:eme:rafpps:raf-01-2016-0006
    DOI: 10.1108/RAF-01-2016-0006
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    Citations

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    Cited by:

    1. Jiang, Xiandeng & Yang, Jin & Yang, Wei & Zhang, Jian, 2021. "Do employees’ voices matter? Unionization and corporate environmental responsibility," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 1265-1281.
    2. Tang, Qi, 2023. "Labor cost and stock price crash risk: Evidence from China," Finance Research Letters, Elsevier, vol. 55(PB).

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