Labor Bargaining Power and Capital Structure: A Study of the Impact of Labor Bargaining Power on Financial Leverage in Sweden

Abstract: In this thesis, data on 277 Swedish listed companies over the period 2005-2011 is used to examine the relationship between labor bargaining power and financial leverage employing two different methods. First, we find that firms with higher unionization rates on average have a lower debt-to-capital ratio. Second, the debt-to-capital ratio is found to be lower in the two quarters before a collective agreement is signed. Both results imply that higher labor bargaining power is related to lower levels of financial leverage. We argue that the Swedish institutional setting, where bargaining is conducted mainly on an industry-wide level and unemployment benefit schemes are relatively extensive, makes debt financing an inefficient strategic tool to enhance the firm's bargaining position toward organized labor. Furthermore, higher labor bargaining power could lead to an increased operating risk, to which firms may respond by lowering their financial leverage in order to keep the total risk at a reasonable level.