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Labor unions and loan contracts

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  • Yi Zhang
  • Guangzi Li
  • Yili Lian

Abstract

This paper investigates the relation between labor unions and loan contracting. We find that firms in more unionized industries tend to have lower loan spreads, longer maturity, a lower likelihood of security requirement, fewer and less strict loan covenants, and fewer performance- based covenants. Additionally, using firm-level union election data, we do not find lower loan spreads or longer maturity in unionized firms, but we show that bank loans to unionized firms are less likely to require security, have fewer and less strict loan covenants, and fewer performance-based covenants. While the results on loan spreads are mixed, we find consistent evidence that unionization has significant effect on loan covenants with industry and firm level unionization data as well as the instrument variable analysis. Labor unions’ risk preference is similar to that of creditors. Therefore, it helps align the interests between banks and labor unions, thus reducing the cost of bank loans in terms of loan covenants.

Suggested Citation

  • Yi Zhang & Guangzi Li & Yili Lian, 2020. "Labor unions and loan contracts," The European Journal of Finance, Taylor & Francis Journals, vol. 26(6), pages 461-479, April.
    • Handle: RePEc:taf:eurjfi:v:26:y:2020:i:6:p:461-479
    DOI: 10.1080/1351847X.2019.1686044
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    Cited by:

    1. Michael L. McIntyre, 2023. "A characterization of the Lender's position in the context of contractual loan conditions," SN Business & Economics, Springer, vol. 3(8), pages 1-27, August.
    2. Moro, Andrea & Maresch, Daniela & Ferrando, Annalisa & Udell, Gregory F., 2022. "Funding innovation and the regulatory environment – The role of employment protection legislation," Journal of Business Research, Elsevier, vol. 145(C), pages 745-756.

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