Do Firms Leave Workers in the Dark Before Wage Negotiations?

This paper provides empirical evidence on strategic use of financial disclosure to enhance bargaining position with labor unions. Since informational advantage of management hinders a union’s bargaining activity, a firm has an incentive to increase information asymmetry between the firm and the employees. Using confidential treatment orders and collective bargaining contract expiration dates, I find that firms strategically choose to redact information about material agreements before wage negotiations. I further find that strategic redaction is amplified when unions cannot accurately predict firms’ prospects, when firms have low growth opportunity, when liquidity is less constrained, and when the estimated costs of a work stoppage are low. The evidence illustrates that a firm’s strategic information sharing with a union entails trade-offs between detrimental capital market outcomes and favorable bargaining condition. JEL classification: J52, M48, G35. ∗I am grateful to my second-year paper committee members, Oguzhan Ozbas, Arthur Korteweg, and Regina Wittenberg Moerman, for their thoughtful advice and in-depth discussions. I also thank Yaron Levi, John Matsusaka, and Ben Zhang for their useful comments and Irene Yi for providing data on contract expirations. I thank the participants at the USC Marshall Ph.D. Conference (2018) and the Transatlantic Doctoral Conference (2019) for valuable comments. USC Marshall School of Business: Email yoo399@usc.edu Information asymmetry increases adverse selection costs and leads to unfavorable capital market outcomes. Despite the detrimental impacts of information asymmetry, firms often choose to take strategic disclosure policy to reduce the costs associated with disclosing information, which is called “proprietary costs” (Verrecchia (1983)). Prior literature demonstrates the effects of proprietary costs on a firm’s disclosure policy (Verrecchia and Weber (2006); Boone et al. (2016)). When information disclosure weakens a firm’s competitive advantage over competitors or other stakeholders, it leads to strategic disclosure. I exploit the impact of unions, one of the most important nonfinancial stakeholders,1 on disclosure policy. While an individual employee exerts limited influence on a firm, labor unions help employees to collectively act and impose extra costs on the firms (Lee and Mas (2012)). 2 My empirical analysis shows that employers strategically manipulate their information environment to enhance bargaining position with labor unions. I also demonstrate various determinants on this behavior, including information uncertainty, growth opportunity, financial constraint, and the costs of strike.3 The influence of unions is not confined to firms. Labor unions are also considered one of the most significant political forces in the United States, engaging in lobbying activities and electioneering. Unions’ lobbying activities include expressing opinions on SEC rule proposals or concept releases by submitting comment letters to the Securities and Exchange Commission (SEC). 4 The main theme encompassing unions’ comment letters is to strengthen the disclosure requirement and expand the disclosure scope of the SEC registrants.5 As anecdotal evidence, unions’ lobbying activities to enhance firms’ information sharing help us conjecture that information on an employer’s financial condition can facilitate a union’s bargaining activity. Confirming this idea, prior field studies suggest that information on firms’ future surplus makes unions bargain more effectively and extract higher surplus (Roth and Malouf (1979); Roth and Murnighan (1982); Kleiner and Bouillon (1988); Frost (2000)). Therefore, union bargaining activities increase the proprietary value of information on firms’ future prospects and promote the management incentive to strategically conceal the relevant information (Verrecchia (1983)). Existing empirical studies provide some indirect empirical evidence on this claim. They show that a strong labor union is associated with deterioration of informativeness in public disclosure (DeAngelo and DeAngelo (1991); Hilary (2006); Chung et al. (2015)). According to the U.S. Census Bureau, the total annual payroll represents $637 billion, while the capital expenditure is $240 billion, in the manufacturing sector during 2015. Union becomes a bargaining representative in a certain workplace if a majority of workers votes for union representation. In such cases, a committee of employees and union representatives negotiate contracts over wages, benefits, and working conditions in a collective way (“collective bargaining”) and handle disputes with management. According to the Bureau of Labor Statistics, the union membership rate has steadily decreased from 20.1% in 1983 to 10.7% in 2017. However, it is hard to understate unions’ influence on the economy since a substantial fraction of large firms are unionized. In Table III, I find that the unionized firms are bigger in terms of total assets and stockholders’ equity and are more profitable than the nonunionized firms. Also, Marciukaityte (2015) documents that the average unionization rate of S&P 500 firms is about 25%. Any individuals and entities are eligible to express their opinions on SEC rule proposals or concept releases in response to requests for public comment. One recent example is the comment letter made by the American Federation of Labor and Congress of Industrial Organizations regarding “SEC Concept Release on Business and Financial Disclosure Required by Regulation S-K (File Number S7-06-16, Release Nos. 33-10064). ”