Abstract:

This study examines the effects of organized labor on firm cost behavior. Drawing on prior literature, we develop two competing hypotheses of cost behavior when organized labor is present at a firm, which we test using asymmetric cost models. Utilizing separate data sources of labor union power measures and multiple model specifications, we find that organized labor reduces cost stickiness, consistent with our pessimistic manager expectation hypothesis. Our results suggest that the development and power of organized labor is an important influence for understanding managers’ cost behavior, and provide new insight on the effects of labor on accounting parameters.

Introduction:

Hsihui Chang isa KPMG Professor of Accounting at Drexel University.