Capital Structure as a Strategic Variable: Evidence from Collective Bargaining (Matsa, JF 2010)

Corporations intentionally cash-constrain themselves by levering up in order to gain bargaining power over labor unions. When unions come knocking at the door, they can throw their hands up and say, “Increase your wages? We barely have enough cash to pay off our interest payments!”

The paper addresses the larger question: What determines capital structure? Most mechanisms in the literature had revolved around taxes (e.g.firms might lever up because they pay less taxes on debt than on equity) or unobservable effort (e.g. keeping managers on a tight leash mitigates information asymmetries between the firm and investors).

In contrast, Matsa’s mechanism is novel and interesting because it pertains to the real activity of the firm.

Find the paper here

Capital Structure as a Strategic Variable: Evidence from Collective Bargaining (Matsa, JF 2010)