Differences in their objective functions lead to possible conflicts of interests between various stakeholders of firms; e.g., between shareholders and employees. These conflicts are more likely to manifest when firms face important investment or governance decisions, specifically, at times of mergers and acquisitions. How does the power of a firm’s labor force affect its exposure and gains in takeovers? In a forthcoming RCFS paper, “Hard Marriage with Heavy Burdens: Organized Labor as Takeover Deterrents,” Xuan Tian and Wenyu Wang study this question using a clever research design. They use the “locally” exogenous variation in labor power created by close-call union elections in a regression discontinuity design. Authors find causal adverse effects of increased labor power on target firms’ takeover exposure, with reductions in target offer premium and announcement returns and longer deal completion times. Authors also explore plausible underlying mechanisms and show that these results are stronger for more powerful and conflict-provoking unions, where the opinions of the target and the acquirer labor forces are more likely to be in conflict. Interestingly, though, the authors also find that the total value created in these takeovers of stronger, unionized labor force is not lower in terms of combined firm announcement returns, post-merger profitability, and long-term market valuation. It is because bidders of unionized targets are more experienced, tougher negotiators that face fewer union threats themselves. Overall, this paper provides new and important insights into the real effects of employee power in the market for corporate control.
Spotlight by Isil Erel
Photos courtesy of Xuan Tian and Wenyu Wang
First published February 4, 2021