 Labor unions and debt covenant violations*Guangzi Li, Yili Lian and Yi Zhang The European Journal of Finance, 2024, vol. 30, issue 9, 1030-1047 Abstract: This study examines the relationship between labor unions and firms’ decisions to violate debt covenants. We find that firms with high unionization rates are more likely to violate debt covenants than firms with low unionization rates. This relationship is stronger for firms with larger cash reserves. Our analysis also reveals that debt covenant violations lead to a lower probability of a strike. Additionally, we find that high-unionization firms are in better financial condition prior to covenant violations than low-unionization firms. Our study confirms the existing literature by showing that long-term abnormal stock returns after covenant violations are significantly positive. However, our results also show that high-unionization firms experience smaller stock returns compared to low-unionization firms. Furthermore, we provide evidence that high-unionization firms tend to manipulate earnings downward before covenant violations. These findings suggest that firms may strategically violate debt covenants to gain bargaining flexibility and force labor unions to make concessions in subsequent negotiations. Date: 2024 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:eurjfi:v:30:y:2024:i:9:p:1030-1047 Ordering information: This journal article can be ordered from DOI: 10.1080/1351847X.2023.2259438 Access Statistics for this article The European Journal of Finance is currently edited by Chris Adcock More articles in The European Journal of Finance from Taylor & Francis Journals |
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