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Testing Strategic Bargaining Models Using Stock Market Data

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  • Joseph S. Tracy

Abstract

This paper presents three empirical teats of a class of asymmetric information bargaining models using stock market data. The basic idea behind these models is that protracted bargaining can be used to infer information that is privately known by another party to the negotiations. A fundamental implication of these models is that there should be evidence that negotiations result in learning taking place. in the context of union contract negotiations, if bargaining is primarily motivated by the union's uncertainty over the firm's future profitability, then there should be evidence that contract negotiations reduce this uncertainty. This prediction is tested by comparing the variance of the firm's stock price prior to and following a contract negotiation. The data indicate that bargaining results in a significant reduction in this variance. Other predictions of these bargaining models are that the firm's stock price should decline during a strike and increase on the settlement date. The data generally support these predictions with the exception of a decline in the firm's equity value following the settlement of a contract which did not involve a strike.

Suggested Citation

  • Joseph S. Tracy, 1988. "Testing Strategic Bargaining Models Using Stock Market Data," NBER Working Papers 2754, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:2754
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    References listed on IDEAS

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    1. Sheena McConnell, "undated". "Cyclical Fluctuations in Strike Activity," Mathematica Policy Research Reports ae5f651b2b044d41b9c54afe4, Mathematica Policy Research.
    2. Sheena McConnell, 1987. "Cyclical Fluctuations in Strike Activity," Working Papers 595, Princeton University, Department of Economics, Industrial Relations Section..
    3. Hayes, Beth, 1984. "Unions and Strikes with Asymmetric Information," Journal of Labor Economics, University of Chicago Press, vol. 2(1), pages 57-83, January.
    4. Drew Fudenberg & Jean Tirole, 1983. "Sequential Bargaining with Incomplete Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(2), pages 221-247.
    5. Sheena McConnell, 1987. "Cyclical Fluctuations in Strike Activity," Working Papers 595, Princeton University, Department of Economics, Industrial Relations Section..
    6. Tracy, Joseph S, 1986. "An Investigation into the Determinants of U.S. Strike Activity," American Economic Review, American Economic Association, vol. 76(3), pages 423-436, June.
    7. Ausubel, Lawrence M. & Cramton, Peter & Deneckere, Raymond J., 2002. "Bargaining with incomplete information," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 3, chapter 50, pages 1897-1945, Elsevier.
    8. French, Kenneth R. & Schwert, G. William & Stambaugh, Robert F., 1987. "Expected stock returns and volatility," Journal of Financial Economics, Elsevier, vol. 19(1), pages 3-29, September.
    9. Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 1-21, February.
    10. Kennan, John, 1987. "The economics of strikes," Handbook of Labor Economics, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 2, chapter 19, pages 1091-1137, Elsevier.
    11. repec:fth:prinin:215 is not listed on IDEAS
    12. Joel Sobel & Ichiro Takahashi, 1983. "A Multistage Model of Bargaining," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 50(3), pages 411-426.
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    Cited by:

    1. John M. Abowd & George T. Milkovich & John M. Hannon, 1990. "The Effects of Human Resource Management Decisions on Shareholder Value," ILR Review, Cornell University, ILR School, vol. 43(3), pages 203-2-236-, April.
    2. Christopher L. Erickson & Daniel J.B. Mitchell, 1996. "Information on Strikes and Union Settlements: Patterns of Coverage in a “Newspaper of Recordâ€," ILR Review, Cornell University, ILR School, vol. 49(3), pages 395-407, April.
    3. Peter Cramton & Hamid Mehran & Joseph Tracy, 2010. "Bargaining with a Shared Interest: The Impact of Employee Stock Ownership Plans on Labor Disputes," Papers of Peter Cramton 98wpesop, University of Maryland, Department of Economics - Peter Cramton, revised Jun 2010.

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