Do Labor Unions Influence Debt Contracting? Evidence from Private and Public Debt Markets

Labor market frictions can influence terms of contracting in the credit market and thereby impact the financing costs for borrowing firms. In this paper, we examine how labor union strength may influence private and public debt covenants. We employ fuzzy Regression Discontinuity Design (RDD) and use plant-level union election outcome data for firms (between 1977 and 2020) as a quasi-exogenous shock to examine the effect of labor unions on firm-level loan and bond market covenants. Our extensive RDD analysis shows that unionization leads to significantly lower covenants in public bond issuances and in particular reduced levels of Investment, Subsequent financing, and Event-related bond restrictions. Loan markets show limited evidence of covenant reduction implying that bank lending, typically collateralized, is less sensitive to labor market frictions.