Do Labor Unions Always Lead to Underinvestment?

Hyungjin Cho
Universidad Carlos III de Madrid, Spain

Bryan Byung-Hee Lee

University of Macau, Macau

Woo-Jong Lee*
Seoul National University, Seoul

Byungcherl Charlie Sohn

University of Macau, Macau

May 2016

Forthcoming at Journal of Management Accounting Research

Abstract
We examine the relation between labor union strength and investment efficiency using
comprehensive firm-level data of Korean listed companies. We find that the perceived
underinvestment related to unionization documented in previous studies is attributable to a
negative relation between union strength and investment in overinvesting firms. In fact, union
strength is positively related to the level of investment in underinvesting firms. We further find
that the relation between union strength and investment efficiency is more pronounced for
chaebol firms where inefficient investments are more likely due to greater agency problems
between the controlling and minority shareholders. Finally, we document that the investment has
more positive value implications in firms with a stronger union. Our results suggest that unions
play an important role as a non-financial stakeholder in curbing inefficient investments.

Key Words: Labor union, investment efficiency, overinvestment, underinvestment, chaebol

JEL classification: G30, G31, J53, J54, M41, M54

* Corresponding author

We thank Ken Borokhovich, Jan Bouwens (Editor), Richard Chung, Simon Fung, Lee-Seok Hwang,
Boochun Jung, Chan-Shik Jung, Min Chung Kim, Soo Young Kwon, Nancy Su, Anne Wyatt, two
anonymous referees, and workshop participants at Seoul National University for their valuable comments
and suggestions. Woo-Jong Lee appreciates financial support by the Institute of Management Research at
Seoul National University.

Electronic copy available at: http://ssrn.com/abstract=2145244

 Do Labor Unions Always Lead to Underinvestment?

1. Introduction

Two opposing streams of literature identify labor unions as either rent seekers or

monitors. The traditional view in one stream regards labor unions as quasi rent-seekers. Labor

unions extract excessive rents and induce underinvestment, and firms reduce employment growth

and use more debt to cope with labor unions rent seeking behavior (Jensen and Meckling, 1976;

Hirsch, 1991, 1992; Bronars and Deere, 1993). The other, relatively recent stream views labor

unions as possible monitors who can mitigate corporate problems. With their incentives aligned

with those of bondholders, labor unions can curb shareholders wealth expropriation (Chen,

Kacperczyk, and Ortiz-Molina, 2012), and mitigate underinvestment (Subramaniam, 1996). The

objective of our study is to shed light on distinguishing labor unions positive versus negative

roles as an important corporate stakeholder by investigating the impact of labor union strength on

improving or aggravating the efficiency of managers investment activities.

Acknowledging that labor unions may have a dual role as collective bargaining agents

and as stewards fighting for workers job security, we question the earlier inference that the

negative relation between labor union strength and investment implies the existence of labor

unions rent-seeking behaviors, which consequently destroy firm value. Instead, the negative

effect of a unionized workforce at the investment level could be a result of the labor unions

ability, in the process of procuring job security in the long-term, to constrain management from

overinvesting rather than to induce underinvesting. Differentiating over- and underinvestment is

therefore important because suppressing overinvestment and encouraging underinvestment have

an opposite value implication. If the previously-reported negative relation between labor union

Electronic copy available at: http://ssrn.com/abstract=2145244

strength and investment stems mainly from mitigating overinvestment, this would be evidence

that labor unions play a monitoring role, which enhances firms long-term sustainability and

preserves workers job security. Conversely, if the negative relation results mostly from labor

unions inducing underinvestment, earlier inferences that labor unions preserve resources for

short-term rent seeking at the expense of firms long-term viability are revalidated. This paper

aims to answer this hitherto unexplored question.

We explore an empirical association between labor union strength and investment

efficiency using a large sample of Korean listed companies for the period 2000 to 2008. Labor

union-specific disclosure requirements of the Korea Exchange allow us to measure firm-level

unionization rates. Further to taking advantage of the unique disclosure requirements to construct

a valid proxy for labor union strength, we rely on prior studies to identify overinvesting or

underinvesting firms. We classify overinvesting and underinvesting firms in two ways. First, to

directly estimate the amount of investment diverging from the optimal level, we rely on a set of

determinants for investments. Under the assumption that the determinants chosen for regressions

reasonably explain a variation of investments, we consider residuals which fall into the top

(bottom) quartile as indicating overinvestment (underinvestment). Second, following Biddle,

Hilary, and Verdi (2009), we regress future investment on the interaction between the labor

union strength variable and the rank variable based on cash reserves and leverage. The rank

variable helps classify firms with more (less) cash reserves or lower (higher) leverage as prone to

overinvestment (underinvestment). We expect that labor union strength improves the efficiency

of firms future investments by mitigating the likelihood of both over- and underinvestment.

Using Korean data has important advantages to achieve the objective of this study. In the

U.S., empirical evidence on labor unions is scarce because no comprehensive firm-level measure

is available for the unionization rate.1 In contrast, comprehensive noise-free firm-year level data

for the unionization rate are available in Korea because Korean listed firms were required to

report the number of union workers in their annual reports before the demise of the requirement

in 2009. Firm-level unionization data is critical to our research question because precisely

differentiating over- and underinvestment can be accomplished at the firm level rather than at the

industry level. Moreover, managers opportunistic investments driven by their empire-building

incentives and labor unions mitigating role are not homogeneous across firms in the same

industry but are unique to each firm. Relatedly, analyzing Korean companies may provide richer

and more insightful implications than using data from more developed markets since, unlike in

developed markets, potential conflicts of interest among various stakeholders (e.g., management,

labor, shareholders, and creditors) may not have reached institutionalized resolutions in Korea.

Moreover, Korean companies provide a rather unique setting in which labor unions play a direct

monitoring role based on their non-cooperative tradition against the management even without a

support from politicians, whereas labor unions in other countries tend to rely on their political

connection to influence managerial decisions.

To further incorporate unique institutional features in Korea, we introduce a distinct

ownership and governance structure in Korea, namely chaebol affiliation. Chaebol, a large

family-controlled business conglomerate, gained much attention in prior studies in economics

and finance. Chaebol firms are characterized as having serious agency problems between

1
While admitting this potential limitation, some recent papers have employed industry level measures of the
unionization rate based on survey data (Chen et al., 2012; Hilary, 2006; Matsa, 2010). For example, to measure
labor strength, Hilary (2006) uses the interaction of the industry-level unionization rate (i.e., the percentage of
employees in the 3-digit industry who are represented by a labor union) and the firm-level labor intensity (i.e., the
firms number of employees scaled by total assets). More recently, other studies have tried to construct firm-level
data by aggregating establishment-level data from the FMCS (Federal Mediation and Conciliation Service), but they
are also far from comprehensive. For example, Chyz, Leung, Li, and Rui (2011) identify less than 300 distinct firms
from FMCS. Moreover, this estimated firm level proxy for unionization rate can suffer from nontrivial
measurement errors. We also note that some studies use small-sample firm-level survey data provided by Barry
Hirsch as sensitivity checks (e.g., Klasa et al., 2009). See Hirsch (1991) for more details.

controlling shareholders and minority shareholders (a.k.a., a Type II agency problem, in contrast

to a Type I agency problem between managers and shareholders). Although proponents of the

leading role of business conglomerates in economies state that the investments of such firms fit

better to their long-term business strategy (e.g., Siegel and Choudhury, 2012), others argue that

serious agency problems in conglomerate firms aggravate inefficiency in investments.

Acknowledging the differential investment patterns in chaebol and non-chaebol firms, we expect

chaebol affiliation to be a moderating variable between labor union strength and investment

efficiency.

Investigating the moderating role of chaebol affiliation in the relation between labor

union strength and investment efficiency is a particularly interesting question because of the

unique industrial relationship in Korean history. Prior studies in labor economics document that

the bargaining power of labor unions is weak in U.S. business conglomerates because such firms

have deep pockets to cross-subsidize strike costs (Rose, 1991). Likewise, if chaebol firms

management preserves its bargaining power by exploiting its deep pockets, labor unions in

chaebol firms would have a weaker influence than those in non-chaebol firms to improve the

efficiency of managers investment activities. In contrast, inheriting the tradition of an ideology-

driven labor movement in Korea, labor unions in chaebol firms are typically militant because the

union leadership has a strong ideological tendency that regards industrial relations as conflicting

and confrontational. Armed with their militant and thus credible threats, the voices of labor

unions in chaebol firms may be better heard than those in non-chaebol firms. In sum, in the U.S.,

labor unions are less influential in conglomerates; however, in Korea, labor unions can be more

influential in conglomerates due to the unique development of labor movement in Korean firms.

This leaves the relative influence of labor unions in chaebol firms as an empirical question. Our

analysis is in a similar spirit with that of Atanassov and Kim (2009) who examine the interaction

among management, labor, and investors with regard to corporate restructuring.

Our analyses yield several findings. First, we find that the previously reported negative

relation between the strength of labor unions and firms investment activities is pronounced only

for overinvesting firms, implying that labor unions play a monitoring role in terms of firms

investment policy by deterring managers value-destroying overinvestment. In contrast,

underinvesting firms show a higher level of investment when they have stronger labor unions,

hinting that labor unions also ameliorate the underinvestment problem. The positive association

between labor union strength and investment efficiency is robust to alternative measures of over-

and underinvestment. Second, we repeat the main analysis with contrasting chaebol and non-

chaebol firms. We find that the role of labor unions in curbing inefficient investment is more

salient in chaebol firms than it is in non-chaebol firms, implying that labor unions in chaebol

firms are more influential, and thus their voices are more likely to be heard in investment

decisions. We further document that investments of firms with stronger labor unions have more

positive value implication than do those in loosely-unionized firms. These findings are also

robust to a battery of sensitivity tests.

This paper contributes to the literature on firms investment policy and labor unions in

several ways. To the best of our knowledge, this is the first study to show the monitoring role of

labor unions in curbing managers opportunistic investment behaviors. This finding enables us to

take another view on labor unions role, and thus opens a new discussion on the validity of the

extant assumption that the presence of labor unions is always detrimental to firm value because

they only seek quasi-rents. Even though labor unions are inherently rent seekers (e.g., evidenced

by higher wages, less operating flexibility, etc.), they also strengthen firms long-term

sustainability by constraining managers opportunistic investments as a byproduct of fighting for

members job security. This finding allows us to better understand the dynamics between

management and labor with regard to investment, which is a crucial corporate decision. We also

attempt to expand this basic dynamic between management and labor by analyzing whether the

impact of labor unions differs with chaebol affiliation. Since managers may have differential

incentives to improve or sacrifice investment efficiency across chaebol and non-chaebol firms,

the dynamics between labor unions and managers are important in understanding the differential

consequences of labor unions influence on managers investment decisions. This is the first

study to show that labor unions value-enhancing role in improving investment efficiency is

reinforced by chaebol affiliation. This paper sheds light on possible future research investigating

the complex dynamics among various stakeholders in a firm in different contexts. We also

present evidence that the monitoring role of labor unions leads to increased firm value following

investments.

Our study has management accounting implications as well. Internal control systems are

an important concern for management accountants. Prior literature has paid attention to how

internal control systems such as cost system designs, internal reporting, and executive

compensations influence managers investment decisions, especially investment efficiency

(Cheng, Dhaliwal, and Zhang, 2013). However, the monitoring role of labor unions in firms

internal control systems has not been investigated. Through their monitoring role, labor unions

can provide managers with an environment in which these internal control systems can bring

about more desirable outcomes. Because employees are the people who first-hand observe the

level of investment inefficiency at the production and distribution sites, they can put the related

information in firms internal control systems, and the extent this input is incorporated into

managerial investment decisions is positively related to employees collective power, i.e., labor

union strength.

The remainder of our paper proceeds as follows. Section 2 reviews the extant literature

and develops our research hypotheses. Section 3 explains how we measure our research variables

and specifies the empirical model used for hypothesis testing. Section 4 describes the sample and

data sources and presents the main empirical results. Section 5 performs additional analyses and

sensitivity tests, and the final section concludes the paper.

2. Literature Review and Hypothesis Development

2.1 Labor union and investment efficiency

There is a wealth of research on the role of labor unions in the corporate investment

decision-making process. A large body of this research is based on the premise that labor unions

are quasi rent-seekers. Jensen and Meckling (1976) propose the possibility that labor unions

become entrenched for their own sake and force extreme underinvestment and/or extract too

much rent. Hirsch (1992) and Bronars and Deere (1993) explain that, as rent seekers, labor

unions use their bargaining position to extract quasi-rents through their contracts. Labor unions

have an incentive to preserve future quasi-rents by pressuring managers to curtail the level, and

reduce the risk, of investments. Consistent with this logic, Bronars and Deere (1993) find that

firms in more heavily unionized industries invest less in plant and equipment, and research and

development (R&D). Hirsch (1992) finds similar results using survey data. These findings

suggest that stronger labor unions bargaining positions can be detrimental to shareholder wealth.

This outcome is sub-optimal if the goal of the firm is to maximize shareholder wealth. Consistent

with this argument, Hirsch (1991) provides evidence that more unionized firms are less

profitable. Also, Chen, Kacperczyk, and Ortiz-Molina (2011) find that the cost of equity is

higher for more unionized firms, and Bradley, Kim, and Tian (2013) report that a labor union

election leads to a decline in patent quantity and quality through various mechanisms such as

reduced R&D expenditures/productivity of inventors, and departures of innovative inventors.

Hirsch (2004) endorses the claims made in prior studies that unionism induces lower profits and

slower employment/productivity growth.

However, there is a possibility that labor unions play a monitoring role to enhance firms

long-term sustainability. Stulz (1990) shows that entrenched managers perquisites increase with

firm size. Managers have an incentive to build empires to gain those perquisites. Jensen (1986)

and Blanchard, Lopez-de-Silanez, and Shleifer (1994) document that, due to the agency problem,

managers have an incentive to overinvest in negative net present value (NPV) projects if excess

cash flows are available, and to grow firms beyond the optimal size. As a stakeholder within a

firm, labor unions have reasonable access to first-hand operational knowledge about managerial

decision-making (Fauver and Fuerst, 2006). Taking advantage of such a position as an informed

stakeholder, labor unions can take actions to lower managerial selection of ex ante negative NPV

projects and trigger early abandonment of ex post poorly performing ones. For example, in

Hyundai Motors, one of the largest automobile companies in Korea, a collective agreement

between management and labor unions requires firms to discuss within the labor union-

management joint committee any purchase of new machines, adoption of new technologies,

product development, or improvement of operating process. In addition, significant investment

decisions such as mergers, acquisitions, spin-offs, buyouts, or transfer of production lines

between factories are subject to approval from the labor union-management joint committee

(Munhwa Ilbo, November 29, 2006), and the labor union must be given a 90-day prior notice of

such an event. Also, Chen, Kacperczyk, and Ortiz-Molina (2012) suggest that union workers

contractual wages and benefits are similar to a payoff on risky debt, and thereby curb

shareholders ability to take actions to expropriate wealth from bondholders. Their empirical

findings indicate that, as a result of such incentive alignment with labor unions and bondholders,

unionized firms have lower costs of debt, and that this relation is stronger in firms with more

severe conflicts between shareholders and bondholders. In sum, labor unions interests are

consistent with preventing overinvestment that deteriorates firms long-term sustainability and

thereby threatens labors job security. Based on this discussion, we posit our first testable

hypothesis on the relation between labor union strength and overinvestment as follows (in

alternative form):

H1a: The strength of a labor union is negatively associated with the investment level in firms

prone to overinvestment.

In contrast, the implication of labor unions for underinvestment is debatable. In firm-

labor relations where the firm makes an investment up-front, the profits are exposed to

expropriation by labor unions, which results in subsequent underinvestment. Debt financing is

then advantageous to the firm since it shields some wealth from labor unions, as evidenced by

the higher leverage ratio in firms with organized labor (Bronars and Deere, 1991). With regard to

financing, recent studies also document that labor union strength is associated with a higher cost

of equity due to operational inflexibility but a lower cost of debt due to incentive alignments with

debt holders (Chen et al., 2011, 2012). Management facing strong labor unions, therefore, prefers

debt financing to equity financing for these reasons. This then results in stronger bargaining

power for debt holders thereby exacerbating the underinvestment problem. On the other hand,

other works document that increasing investment reduces the possible discount in debt issuance

and, therefore, the use of debt can mitigate the underinvestment problem (Subramaniam, 1996).

Furthermore, unionized firms tend to strategically hold less cash to gain bargaining advantages

over labor unions (Klasa et al., 2009). To the extent that firms use their cash balance for

investment, underinvestment problems can be mitigated. More importantly, labor also has a stake

in long-run firm value. Without a sustainable level of business activities and profitability, labor

union members can lose their jobs in the long-term. This long-term interest is not in line with

forcing management to underinvest since underinvestment may decrease the size of labor unions

future quasi-rents.2 In sum, the association between labor unions and underinvestment depends

on whether the labor unions are myopic rent seekers or dedicated stakeholders, and therefore the

relation between labor unions and underinvestment is an empirical question. Based on this

discussion, we posit our second hypothesis on the relation between labor union strength and

underinvestment as follows (in null form):

H1b: The strength of a labor union is not associated with the investment level in firms prone to

underinvestment.

2.2 The role of labor unions in chaebol firms

A chaebol represents a unique ownership structure in Korean companies because a

chaebol affiliation affects many aspects of financing, investment, and operation decisions and

consequences for Korean firms. Chaebol, large family-controlled business conglomerates, have

2
Relatedly, Jensen (2010) proposes the Enlightened Value Maximization Theory as an alternative to the firms
goal of maximizing shareholder wealth. He argues that if a firms goal is to increase the long-run firm value, the
firm should care not only about the interests of financial claimholders, but also about the interests of other
stakeholders such as employees, customers, and communities. Consistent with this, Fauver and Fuerst (2006) show
that labor representation on the supervisory board provides a powerful means of monitoring and reduces agency
costs within the firm, resulting in a positive value implication.

10

been thoroughly investigated in prior studies in economics and finance. In deriving Hypothesis 1,

we focus on the relative bargaining powers of managers and labor unions. Yet, there is another

important stakeholder in many Korean firms, namely controlling shareholders. Therefore,

examining the agency problems between controlling shareholders and minority shareholders

(a.k.a., a Type II agency problem, in contrast to a Type I agency problem between managers and

shareholders) with regard to firms investment activities, and the monitoring role, if any, of labor

unions in affecting these agency problems is an interesting topic. Chaebol firms are characterized

as having serious agency problems between controlling shareholders and minority shareholders.

These Type II agency problems in chaebol usually induce overinvestments because entrenched

controlling shareholders often push managers to take negative NPV investment projects in an

attempt to increase the size and scope of the firm well beyond the optimal level (Jensen, 1986).

Controlling shareholders in chaebol firms tend to keep overinvesting because such empire-

building activities provide firms with better access to arms-length financing, which can later be

diverted to the controlling shareholders private benefits. This is possibly due to the close links

among banks, businesses, and government through the family, political, and ownership

connections. Thus, the presence of powerful controlling shareholders in chaebol firms likely

leads to overinvestment. Another stream of literature, however, argues that entrenched

management also has incentives to enjoy a quiet life, which results in underinvestment

(Bertrand and Mullainathan, 2003). Managers in family-owned firms may prefer to underinvest

due to risk aversion and severely concentrated personal wealth in terms of both financial and

human capitals (John, Litov, and Yeung, 2008). This quiet life theory for entrenched managers

can be easily extended to the entrenched controlling shareholders (and managers) in chaebol

firms. Furthermore, given their close partnership with the government and other business

11

families, chaebol firms may not need to take excessive risk. Although the preceding line of prior

literature indicates less efficient investment in business conglomerates, several recent studies

present the opposite results. For example, analyzing Indian companies, Siegel and Choudhury

(2012) report that firms in business conglomerates engage in longer-term investments, which fit

well with their business strategy.

Acknowledging the differential investment patterns in chaebol and non-chaebol firms, we

expect that chaebol affiliation can be a moderating variable between labor union strength and

investment efficiency. Looking into the interaction between labor unions and chaebol firms and

their relation to investment efficiency is particularly interesting because the industrial

relationship is, like in western countries, non-cooperative in Korea but in a unique way. Prior

studies in labor economics document that the bargaining power of labor unions is weak in U.S.

business conglomerates because such firms have deep pockets to cross-subsidize strike costs

(Rose, 1991). This logic can also be applied to Korean chaebol firms because member firms as a

whole have deeper pockets than individual non-chaebol firms. If so, we can theoretically infer

that the labor unions in chaebol firms would have weaker bargaining power than those in non-

chaebol firms and, as a result, have a limited impact on improving the efficiency of managers

investment activities. On the contrary, the bargaining power of the labor unions in chaebol firms

can be stronger. During the period of democratization in Korea, the labor movement was often

referred to as militant unionism. Using strikes and other militant actions, labor unions often

nullified the limits of legitimate labor union activities which were narrowly defined and enforced

by an oppressive government. Inheriting the tradition of this labor movement in Korea, labor

unions in chaebol firms are typically militant because the labor union leadership in chaebol firms

has a strong ideological tendency that primarily regards industrial relations as confrontational.

12

As a result, labor union activities are centered on aggressive collective bargaining propelled by

frequent strikes. In this case, compared to the labor unions in non-chaebol firms, the labor unions

in chaebol firms, armed with stronger bargaining power, can intervene in managers investment

activities to preserve their long-term job security, leading to more efficient corporate investments.

In sum, in the U.S., labor unions are less influential in conglomerates; however, in Korea, labor

unions can be more influential in conglomerates due to the distinct development of the labor

movement in the country. This leaves the relative influence of labor unions in chaebol firms as

an empirical question. We thus state the last hypothesis as follows (in null form):

H2: The relation between labor union strength and overinvestment (underinvestment) does not

vary with chaebol affiliation.

3. Research Design

In this section, we present the models used to test the association between labor union

strength and investment efficiency. We employ the specification based on the work of Biddle et

al. (2009), which directly links the level of abnormal investment to labor union strength (we call

this an unconditional specification). To identify over- and underinvestment, Biddle et al. (2009)

estimate excessive investment from the first stage model determining total investment levels.

Specifically, they estimate the following regression equation for each industry-year to identify

over- and underinvestment.

(1)
Investmenti,t+1 = a0 + a1 SalesGrowthi,t + ei,t+1.

Using Eq. (1), we regress total investment, defined as the sum of capital expenditures,

R&D expenditures, and acquisitions minus sales of property, plant and equipment scaled by

13

lagged total assets, for a firm in year t+1 on its sales growth from year t-1 to t, for each industry-

year, with at least 20 observations in a given year.3 The estimated residual in Eq. (1) is our proxy

for abnormal investment, which deviates from the optimal business level. Then, we sort firms

based on their residuals into quartiles for each year. Firm-year observations in the top (bottom)

quartile are classified as overinvesting (underinvesting) firms (Over1 and Under1). The other

two middle quartiles are the benchmark groups. Firms belonging to this top (bottom) category

are most likely to have overinvested (underinvested) in comparison with past sales growth.

To ensure that our results are not driven by omitted variables due to the parsimony of Eq.

(1), we also check the robustness of our results by adopting a more comprehensive set of

determinants in the first stage model. This second model is the investment sensitivity model from

Fazzari, Hubbard, and Petersen (1988). Since they explain firms investment using growth

opportunity and financing constraints, many subsequent studies have adopted this methodology

to investigate various topics affecting investment sensitivity such as leverage, ownership, stock

price, cash savings, and investor protections (e.g., Lang, Oftek, and Stulz, 1996; Cho, 1998;

Baker, Stein, and Wurgler, 2003; Almeida, Campello, and Weisbach, 2004; McLean, Zhang, and

Zhao, 2012), even though a controversy exists over the validity of this model (Kaplan and

Zingales, 1997). We regress the following specification for each industry-year to identify our

second measure of over- and underinvestment (Over2 and Under2).

Investmenti,t+1 = a0 + a1 Qi,t + a2 CFO/TAi,t + a3 SalesGrowthi,t + ei,t+1, (2)

where Q is Tobins q, estimated as the market value of equity minus the book value of equity

plus the book value of assets scaled by the book value of assets, CFO/TA is cash flow from

3
For industry classification, we rely on the 3-digit KSIC (Korea Standard Industry Code, which is very similar to
SIC) defined by the Bureau of Statistics. This results in 35 unique industries.

14

operations scaled by lagged total assets, and the other variables are as previously defined (all the

independent variables are lagged by one year compared to the dependent variable). We add sales

growth to the basic investment sensitivity model to capture the effect of growth opportunity more

precisely. A firm is classified as an overinvesting (underinvesting) firm if its estimated residual

from Eq. (2) falls into the top (bottom) quartile of annual distributions.

We investigate the differential effect of labor unions on future investments between these

overinvesting/underinvesting versus benchmark firms. Using each of the two alternative

indicators of abnormal investment, we estimate multinomial logistic regressions for Eq. (3) to

test for the relation between labor union strength and abnormal investment.

Overi,t+1 (Underi,t+1) = b0 + b1 Uratei,t + Controli,t + Year + Industry + ei,t+1, (3)

where Over (Under) represents Over1 or Under1 (Over2 or Under2) in each multinomial logistic

regression, Urate is the fraction of labor union members to total number of employees. For

control variables, following Biddle et al. (2009), we include firm size (Log(Assets)), the book-to-

market ratio (B/M), cash margin (CFO/Sales), operating cycle (OperCycle), asset tangibility

(Tangibility), loss dummy (Loss), standard deviation of cash flow from operations, sales, and

investment ((CFO), (Sales), (Investment), respectively), firm age (Age), dividend payment

dummy (Dividend), distress dummy (Distress), and sales growth (SalesGrowth). At a later stage

when we introduce the unique feature of business organizations and industrial relations in Korea,

we also include an indicator variable representing chaebol membership (Chaebol) and its

interaction term with Urate. Finally, we include Year and Industry, which are a series of dummy

variables for each year and industry represented in the sample. This is to control for the

15

unobserved factors that may influence labor union strength and investment incentives/constraints

to different degrees across industries and years. The detailed variable definitions are in Table 1.

Multinomial logistic regressions predict the probabilities of the different outcomes of a

categorically distributed dependent variable Over, Under, and the benchmark categories in Eq

(3). Our main hypotheses (H1a and H1b) are that labor unions reduce overinvestment and may

reduce underinvestment as well. Therefore, when the dependent variable is Over, we expect

coefficient b1 to be negative in Eq. (3), which indicates that labor unions mitigate overinvestment

problems. We expect this coefficient to be negative (positive) when the dependent variable is

Under, if labor unions mitigate (exacerbate) underinvestment problems.

To test H2, we introduce an indicator for chaebol affiliation (Chaebol) and interact it with

Urate in Eq. (3) to see the interplay of controlling shareholders and labor unions in affecting

firms investment efficiency in chaebol firms. Since H2 is non-directional, we do not make a

directional prediction on the impact of chaebol affiliation in the relation between labor union

strength and investment efficiency.

[INSERT TABLE 1 ABOUT HERE]

4. Empirical Results

4.1 Data description

Our sample covers non-financial companies listed on the Korean Stock Exchange from

2000 to 2008. In our sample period, all listed firms are required to report the number of labor

union members (and total employees) in the electronic corporate filing services of the Financial

Supervisory Services (http://englishdart.fss.or.kr/, equivalent to the SEC in the U.S.). We use

hand-collected data for the firm-year unionization rates (the ratio of the number of labor union

16

members to the number of total employees). The sample period ends in 2008 because most of

listed Korean companies stop disclosing labor union information from 2009 onward because it

was no longer mandatory.4 In addition to the labor union data, we retrieve financial data and

ownership data from two databases developed by the Korea Listed Companies Association

(KLCA) and the Korea Investors Service (KIS). The observations are deleted if the data on firm-

year level unionization rates or on the main variables used in our analyses are missing. To

alleviate concerns over potential problems arising from the existence of extreme outliers, we

winsorize observations that fall within the top and bottom 1% of the annual empirical

distributions of our major research variables. We follow the standard procedure of dropping

financial firms. After these sample selection criteria, we have a final sample of 2,904 firm-years

and 486 unique firms during our sample period.

Table 2 provides summary statistics for the full sample. As for the main interest variables,

the mean (median) value of the unionization rate is 47.7% (56.0%). For the average (median)

firm, the total investment comprises 2.8% (1.6%) of lagged total assets. The mean (median)

value of the book-to-market ratio (B/M) is 1.928 (1.670), which is well known as the Korea

discount, meaning that the market value is lower than the book value of equity. As shown in

many papers (e.g., Black and Kim, 2012), this is a characteristic of the entire sample of Korean

listed firms. We omit explanations for other control variables because they are self-explanatory.

[INSERT TABLE 2 ABOUT HERE]

4.2 Labor unions and investment efficiency

4
In 2009, the section for the labor union information was removed from the annual report template in the electronic
corporate filing service.

17

 Our main hypotheses state that the level of a firms overinvestment decreases with its

labor union strength (i.e., H1a), whereas its underinvestment does not vary with its labor union

strength (i.e., H1b). We measure the strength of a labor union by the unionization rate (Urate)

and test H1a and H1b by regressing the under- or overinvestment dummy on Urate using Eq. (3).

The results are reported in Table 3. To compare our results with those of prior studies, we first

regress total investment against Urate in Column (1).5 The coefficient on Urate is negative and

significant at the 5% level (-0.013, t-value = -2.55). This is consistent with the negative relation

between labor union strength and various measures of investments documented in prior studies

(Hirsch, 1992; Bronars and Deere, 1993).

Columns (2) and (3) report the results of multinomial logit regression from Eq. (3) when

the dependent variable is Over1 and Under1, respectively. The reference category of the

dependent variable for multinomial logit regressions includes firms not falling into the over- or

underinvestment categories (i.e., the two quartiles in the middle). The coefficients on Urate are

significantly negative, which is -1.407 (p-value < 0.00) and -1.225 (p-value < 0.00) in Columns

(2) and (3), respectively. This indicates that labor unions mitigate overinvestment, strongly

supporting H1a, and that they also assuage underinvestment, rejecting the null hypothesis of H1b

in favor of labor unions monitoring role. The results using Over2 and Under2 as the dependent

variables, summarized in Columns (4) and (5), are qualitatively the same. Overall, the results in

Table 3 support H1a (reject H1b) by showing that the strength of labor unions improves

investment efficiency by mitigating both managers under- and overinvestment, which are

contrasted with the notion in previous literature that strong labor unions encourage managers to

underinvest to procure exploitable rents. We find similar results when we estimate the logistic

regressions using Over1, Under1, Over2, or Under2 as the dependent variables (untabulated).

5
Note that we do not have the intercept in Column (1), because the results are based on firm-fixed effect estimation.

18

The effect of labor union strength on the probability of a firm falling in the over- or

underinvestment quartile is also economically significant. For example, when over- and

underinvestment are proxied by Over2 and Under2 in the logistic regression, respectively, the

marginal effects of Urate on Over2 and Under2 are -0.116 and -0.092, respectively (untabulated).

This indicates that one standard deviation increase in Urate causes a 3.3% point decrease (= -

0.116*0.283) and 2.6% point decrease (= -0.092*0.283) in the probability for a firm to over- and

underinvest, respectively.

In sum, the results in Table 3 indicate that the previously reported negative relation

between labor union strength and the overall investment level is not due to labor unions

inducement to underinvest, but rather labor unions mitigation of overinvestment to preserve

their future rents by deterring managers from jeopardizing the firms long-term sustainability .

Underinvestment is also less likely in firms with stronger labor unions, suggesting that the

presence of strong labor unions curtail both inefficient over- and underinvestment.

Turning to control variables, cash margin, operating cycle, tangibility, volatility of cash

flows, and financial distress decrease the investment efficiency by exacerbating overinvestment,

while firm size, loss dummy, firm age, and dividend payment increase the investment efficiency

by mitigating overinvestment as shown in Columns (2) and (4). Cash margin, tangibility,

financial distress, and sales growth decrease the investment efficiency by aggravating

underinvestment, whereas firm size and age increase the investment efficiency by deterring

underinvestment as shown in Columns (3) and (5). A more important point is that the

coefficients on Urate are significantly negative in Columns (2) to (5) after controlling for the

effects of these control variables.

[INSERT TABLE 3 ABOUT HERE]

19

4.3 The impact of chaebol membership on the relation between labor unions and

investment efficiency

In this subsection, we examine whether and how chaebol membership affects the

dynamic between management and labor unions in forming firms investment efficiency. We

interact an indicator of chaebol membership (Chaebol) with Urate and add this interaction term

to Eq. (3).

The results are reported in Table 4. The proxy for over- and underinvestment is Over1

and Under1 in Columns (1) and (2), and Over2 and Under2 in Columns (3) and (4), respectively.

As in Table 3, the coefficients on Urate are still negative and statistically significant in all

columns. The coefficient on Urate*Chaebol is negative and significant in each column. For

example, it is -1.991 and -1.664 in Columns (3) and (4), respectively, when over- and

underinvestment are measured by Over2 and Under2, respectively, which are both significant at

the 1% level. This implies that stronger labor unions effectively suppress managers suboptimal

investment decisions in chaebol firms to a greater extent than they do in non-chaebol firms both

through the mitigation of over- and underinvestment, rejecting the null hypothesis of H2 in favor

of the existence of chaebols moderating effect. Interestingly, the coefficients on Chaebol are

significantly positive across all columns, implying inefficient investment in chaebol firms on

average.

[INSERT TABLE 4 ABOUT HERE]

5. Additional Analyses and Sensitivity Tests

5.1 The impact of labor unions in other affiliated companies

20

 A resource-based view of the business group stresses that firms in a business group take

advantage of other member firms by inheriting their knowledge and sharing resources. For

example, Chang and Hong (2000) confirm positive profitability impacts of group-level resource

variables, such as advertisement, intra-group transactions and R&D expenditures. A related

question would be whether the stronger investment impact of labor unions in chaebol firms stems

from plausible correlations in investment patterns and labor union activities attributable to a

similarity in human resource policies across member firms. Anecdotal evidence suggests that the

unionization rates of companies within the same business group are correlated with each other.

For instance, many firms within Samsung, the largest business group in Korea, do not have a

labor union, because of its corporate policy, whereas firms within Hyundai Motors, the second

largest business group, have a strong labor union with a relatively higher ratio of labor union

members to total employees. We indeed find that the focal firms unionization rate is

significantly and positively correlated with the average unionization rate of other firms within

the same business group (Pearson correlation = 0.824, p-value < 0.01). It is thus an interesting

task to horse-race the influences of labor unions in the focal firms and in other member firms.

More importantly, comparing the impacts of affiliated labor unions provides evidence that the

previously discussed efficient investment in unionized firms results from the labor unions

influence in the focal firm and not from the influence of other labor unions in member firms. To

do this, we test whether the unionization of other affiliated companies within the same business

group influences the focal firms investment behaviors.

Table 5 shows the multinomial logistic regression results with the average value of

unionization rates for other companies within the same business group (Gurate). Similar to the

previous regressions, the reference category is two middle quartiles which do not belong to over-

21

or underinvestment quartiles. When the dependent variables are Over1 and Under1, the

coefficients on Gurate are negative but insignificant (-0.356, p-value = 0.51 and -0.147, p-value

= 0.81, respectively). They are also insignificant when the dependent variables are Over2 and

Under2. In contrast, while the coefficients on Urate are negative but insignificant in Columns (1)

and (2) (-0.833, p-value = 0.22 and -0.816, p-value = 0.29, respectively), they are significantly

negative in Columns (3) and (4) (-1.479, p-value = 0.04 and -1.640, p-value = 0.03, respectively).

These results indicate that the focal firms labor union has a stronger influence on improving a

firms investment efficiency than the labor unions of other affiliated firms in the same business

group do. Weaker significances of the coefficient on Urate in Table 5 relative to those in Table 3

can be attributable to the high correlation between Urate and Gurate.

[INSERT TABLE 5 ABOUT HERE]

5.2 The impact of ESOP on the relation between labor union strength and investment

efficiency

In this section, we attempt to identify when employees have more incentives to curb

suboptimal investments or stronger motivations to acquire more business knowledge. Prior

studies document that the employee stock ownership plan (ESOP) can increase productivity by

improving workers incentives (e.g., Kim and Ouimet, 2014). Further, labor unions in firms with

ESOP are more likely to be dedicated and smarter stakeholders than are those in firms without

ESOP, because the formers wealth is closely related to firm value. Thus, the incentive alignment

between the firm and the labor union due to ESOP may enhance a reduction in the suboptimal

investment decisions in the firms with labor unions. This is of particular interest because

incentive alignment and stronger motivation provide a means to better distinguish the labor

22

unions type a rent-seeker or a non-financial stakeholder. To do this, we partition the sample in

two based on whether employees are granted ESOP.

Table 6 presents the results. The coefficients on Urate are significant and negative

throughout all columns except Column (4), implying that even when workers are not granted

share incentives, they still serve as a non-financial stakeholder who contributes to efficient

investment by exploiting their influence through labor unions. More importantly, the absolute

magnitudes of the coefficients on Urate are larger for firms with ESOP than they are for firms

without ESOP. For instance, the coefficients on Urate in Columns (5) and (6) are -0.857 and -

0.977, respectively, and it is -1.533 and -2.651 in Columns (7) and (8), respectively. Although

the difference between the coefficients on Urate in Columns (5) and (7) is insignificant, the

difference between the coefficients on Urate in Columns (6) and (8) is statistically significant at

the 5% level. 6 This result indicates that labor unions are more active in curbing suboptimal

investment decisions when employees are granted ESOP, supporting the view that labor unions

disciplining effects on investment efficiency is more salient when their incentives are better

aligned with financial stakeholders and their motivations to acquire business knowledge are

stronger. 7

[INSERT TABLE 6 ABOUT HERE]

6
We follow Clogg, Petkova, and Haritou (1995) to check whether the difference in the coefficients from two
regression models is statistically significant. Specifically, we calculate the z-statistics as follows:
z = (bG1 bG2)/ [ SE (bG1) 2 SE (bG 2) 2 ] , where bG1 (bG2) and SE(bG1) (SE(bG2)) refer to the coefficients on
the variables of interest and its standard errors in the first (second) regression.
7
We call for caution with this interpretation. The magnitude of the Urate coefficient is not larger in ESOP firms
than it is in non-ESOP firms when we use Over1 and Under1 in Columns (1) to (4). This could be attributable to the
possible correlation of ESOP with cash balance and/or firm growth (Ding and Sun, 2001). Eq. (2) to estimate Over2
and Under2 teases out the investment related to cash balance and growth potential using CFO/TA and Q, but Eq. (1)
to estimate Over1 and Under1 does not. As a result, Over1 and Under1 are still likely to contain the variation of
investment explained by cash balance and growth potential, which would otherwise be teased out when measuring
the optimal investment. We cannot preclude the possibility of such a parsimony of Eq. (1) biasing the coefficient on
Urate when the sample is divided based on ESOP.

23

5.3 Accounting for endogeneity of unionization

Although management cannot discriminate against unionized employees via their

contracts, management may indirectly put these employees in a disadvantaged position. Thus,

our measure of labor union strength, Urate, could be endogenous. We address this concern by

using 2SLS regressions. Prior literature documents that when the number of female employees is

larger in a firm, the firm is less likely to have a labor union and, if it does, the unionization rate is

lower (e.g., Antos, Chandler, and Mellow 1980). Thus, following Chung, Lee, Lee, and Sohn

(2016), we use the ratio of female employees to total employees (Female) as an instrumental

variable for the unionization rate.

In the first stage, we regress the unionization rate on Female, industry and year-fixed

effects, and other control variables in Eq. (3). Column (1) of Table 7 shows that the coefficient

on Female is negative and significant (-0.182, t-value = -7.12), which is consistent with our

expectation. Using the fitted value of Urate from the first stage regression, we re-estimate the

results in Table 3. In Column (2), the coefficient on Urate is significantly negative, consistent

with that in Table 3. More importantly, the coefficients on Urate are significantly negative in

Columns (3) to (6). These results indicate that labor unions monitoring role in enhancing

investment efficiency is robust to controlling for the endogeneity of labor union strength.

[INSERT TABLE 7 ABOUT HERE]

5.4 Conditional regressions

24

 In addition to the unconditional specification, we use a conditional specification to test

the robustness of our results. 8 We focus on the relation between labor union strength and

investment efficiency conditional on a given firms likelihood of overinvesting or underinvesting.

Following Biddle et al. (2009) and Cheng et al. (2013), we use the combined rank variable using

cash reserves and leverage to measure the likelihood of over- or underinvestment (Cash_Lev).

Previous research documents that firms with larger cash balances are more likely to overinvest,

while higher leveraged firms have a limited access to funds and thus are more likely to

underinvest (Myers, 1977; Jensen, 1986; Opler, Pinkowitz, Stulz, and Williamson, 1999).

Specifically, we sort firms into deciles based on cash balance (sum of cash and cash equivalents

scaled by total assets), and then based on (-1)*leverage (sum of short-term and long-term debts

scaled by total assets). We take the average of the two decile ranks after scaling each to fall into

a zero-to-one range. 9 This likelihood measure for over- (or under-) investment enables us to

consider the impact of labor union strength on firms investment conditional on a firms

propensity to over- or underinvest. We estimate Eq. (4) to test for the relation between labor

union strength and investment level conditional on the overinvestment likelihood.

Investmenti,t+1 = b0 + b1 Uratei,t + b2 Cash_Levi,t + b3 Uratei,t*Cash_Levi,t

+ Controli,t + Year + Industry + ei,t+1. (4)

We estimate Eq. (4) using ordinary least squares regressions, adjusting the standard errors

for heteroskedasticity, and serial- and cross-sectional correlations by firm- and year-level

8
Following Biddle et al. (2009), we call this specification a conditional regression in comparison with an
unconditional regression.
9
The disadvantage of using average measures is that a high value in one variable can largely influence the average.
To see whether our results are sensitive to the specification of Cash_Lev, we adopt alternative measures: i) the first
principal component of cash balance and leverage from the factor analysis, ii) the indicator that takes the value of
one if a firm is in the upper quartile of both cash balance and (-1)*leverage in a year, and zero otherwise. All of our
main implications are robust to these alternative variable constructions.

25

clustering (Petersen 2009; Gow, Ormazabal, Taylor 2010). Furthermore, we conduct firm-level

fixed-effect regressions to account for unobservable correlated factors. We expect that b1 and b3

are positive and negative, respectively, and b3 is greater in absolute value than b1 (i.e., b1 + b3 <

0) in Eq. (4). This indicates that labor unions increase (decrease) investment when

underinvestment (overinvestment) is more likely, that is, when Cash_Lev is close to zero (one).

This empirical specification is also similar to Hirschs (1991) approach in his study of

unionization and profitability. To test H2, we interact chaebol affiliation dummy (Chaebol) with

Urate and Urate*Cash_Lev in Eq. (4).

The results are reported in Table 8. We tabulate each of the results, repeating the analyses

in Tables 3-7 using the conditional specification, in Panels A-E. Panel A presents the effect of

labor union strength on a firms investment level, conditional on its likelihood of under- or

overinvesting. The coefficient on Cash_Lev is significantly positive, indicating that this measure

captures firms overinvestment likelihood successfully. The coefficient on Urate*Cash_Lev is

negative and significant at the 1% level (-0.058, t-value = -4.09). In contrast, the coefficient on

Urate is positive and significant at the 10% level (0.016, t-value = 1.80). The sum of the

coefficients on Urate and Urate*Cash_Lev is significantly negative at the 1% level. These

results indicate that labor unions reduce the level of investment when their firms are prone to

overinvestment, supporting H1a, while they increase the level of investment when their firms are

likely to underinvest, rejecting the null hypothesis of H1b in favor of labor unions mitigating

underinvestment. The results are also consistent with those based on the unconditional

specification in Table 3. The effect of labor union strength on the level of total investment is also

economically significant: one standard deviation increase in Urate causes a -1.2% point change

(= (0.016-0.058)*0.283) in total investment for overinvesting firms. This change is a 42.9%

26

decrease in total investment in overinvesting firms, given 2.8% mean value of total investment to

lagged assets in Table 2. In a similar calculation, a one standard deviation increase in Urate

causes a 17.9% increase in total investment in underinvesting firms.

Panel B shows the impact of chaebol membership on the relation between labor unions

and investment efficiency. The coefficients on Urate*Cash_Lev and Urate*Cash_Lev*Chaebol

are significantly negative (-0.040, t-value = -2.57, and -0.098, t-value = -2.86, respectively). This

is evidence of labor unions mitigating overinvestment in both chaebol and non-chaebol firms,

but the effect is stronger in chaebol versus non-chaebol firms. Thus, we reject the null hypothesis

of H2 in favor of the existence of chaebols overinvestment mitigation effect.10 This suggests

that labor unions constrain the overinvestment of controlling owners in chaebol firms to a greater

extent than they do in non-chaebol firms probably due to their stronger power to affect firms

long-term sustainability. 11 Panel C tabulates the impact of labor unions in other affiliated

companies. The coefficient on Urate*Cash_Lev is significantly negative, whereas the coefficient

on Gurate*Cash_Lev is negative but insignificant. This indicates that the focal firms labor union

strength has a greater effect on constraining overinvestment compared with the labor union

strength of affiliated companies, which is consistent with the results in Table 5.

10
The coefficient on Urate*Chaebol is positive but insignificant implying no effect of chaebol affiliation on labor
unions mitigating underinvestment, which is inconsistent with the results using the unconditional specification in
Table 4. This may arise due to the definition of over- and underinvesting likelihoods in Eq. (4), which does not
correspond to Over1 (Under1) or Over2 (Under2) based on the top (bottom) quartile of the residuals from Eqs. (1)
and (2). We newly specify over- and underinvesting likelihoods separately by defining the top (bottom) quartile of
Cash_Lev distribution as LikelyOver and LikelyUnder indicators, respectively, and repeat the analysis from Table 8
Panel B. The coefficient on Urate*LikelyOver*Chaebol is significantly negative (coeff. = -0.045, t-value = -2.48),
and the coefficient on Urate*LikelyUnder*Chaebol is significantly positive (coeff. = 0.044, t-value = 1.72), which is
consistent with the results in Table 4.
11
We conduct a similar analysis with the chaebol effect after replacing the chaebol indicator with the indicator for
the existence of foreign investors. We find that foreign investors improve underinvestment but do not affect
overinvestment (untabulated).

27

 Panel D presents the impact of ESOP on the relation between labor union strength and

investment efficiency. The coefficient on Urate*Cash_Lev for firms with ESOP is significantly

negative (Column (2)), and its absolute magnitude is larger than that of the coefficient on

Urate*Cash_Lev for firms without ESOP (Column (1)). The coefficients on Urate are

significantly positive both in ESOP and non-ESOP firms, and its magnitude is also significantly

larger in ESOP firms. These results are consistent with those in Table 6 in that labor unions are

more active in curbing suboptimal investment decisions through mitigating both over- and

underinvestment when employees are granted ESOP. Panel E replicates the endogeneity analysis

in Table 7 using the conditional specification. The coefficient on Urate*Cash_Lev is

significantly negative (-0.124, t-value = -5.27) when we use the fitted value of Urate from the

first stage regression in Table 7. This is consistent with the results from unconditional

regressions.

Overall, the main implications are unaltered when we repeat the analyses of Tables 3-7

using the conditional specification, indicating that our main findings are robust to different

empirical specifications.

5.5 Value implication of labor union activity

If labor unions constrain managers overinvestment to preserve firms long-term

sustainability and their members jobs by preventing resource waste, this monitoring role would

lead to increased sensitivities of profitability and/or firm value to investment. In contrast, if labor

unions motivation is to preserve exploitable resources for their future rent-seeking, their action

would minimally affect these sensitivities. To test this prediction, we regress one-year-ahead

28

return on assets (ROA) or current Tobins q (Q) on Urate, Investment, Urate*Investment, and

other control variables.

The results are presented in Columns (1) and (2) of Table 9, where the dependent variable

is ROA and Q, respectively. When the dependent variable is forward ROA, the coefficient on

Urate*Investment is positive but insignificant (0.006, t-value = 0.09) in Column (1). In Column

(2), the coefficient on Urate is negative, which is consistent with the general notion reported in

prior literature that labor unions depress firms value. Most importantly, the coefficient on

Urate*Investment is positive and significant at the 1% level (1.392; t-value = 3.35). This means

that the consequence of corporate investment is more likely to be value-enhancing when a firms

labor union is stronger, probably because labor unions alleviate managers resource

misallocations by constraining over- and underinvestment.

[INSERT TABLE 9 ABOUT HERE]

5.6 Other sensitivity tests

Investment decisions are also a critical managerial activity for other stakeholders. Foreign

investors play a unique role as an important long-term stakeholder in many Korean firms. The

block shareholders and debt holders also have their own incentives to affect firms investment

policies. We, therefore, additionally control for empirical proxies for these stakeholders in the

regressions. Specifically, we include indicators for the existence of foreign ownership, block

ownership, public bonds, and private loans in Table 3. Untabulated results suggest that the

presence of block ownership reduces overinvestment and that the presence of public bondholders

mitigates underinvestment, both of which are incremental to the disciplining effect of labor

unions on investment efficiency. More importantly, the effect of labor unions on the mitigation

29

of under- and overinvestment is robust to these additional controls, implying that the labor union

effect is independent and incremental to the impacts of other financial stakeholders.12

Gow et al. (2015) claim that control variables should consist of confounders only and that

causal inferences cannot be drawn in an unbiased way when control variables include mediators

or colliders. We test and find that eight out of 13 control variables in our main regression model

are confounders, some of which are also mediators or colliders. We repeat our main and

additional analyses after i) including confounders which are neither mediators nor colliders, ii)

excluding mediators, iii) excluding colliders, and iv) excluding mediators and colliders, which

are not confounders. The main thrust of our results is unaltered in these tests (unreported).

6. Conclusion

In this paper, we investigate the complex dynamics among various corporate stakeholders

such as management, labor, shareholders, and creditors in terms of their interactions to affect

firms investment policy. Using a large sample of Korean listed firms for which precise firm-

year level unionization rates are available, we find that the level of investment decreases

(increases) with the unionization rate in firms that are more prone to overinvestment

(underinvestment). We also report that the disciplining role of labor unions in bringing efficiency

in investment is more significant in chaebol firms than it is in non-chaebol firms. Taken together,

we provide evidence that managers with strong labor unions tend to improve investment

efficiency through reducing both over- and underinvestment, especially when the influence of

labor unions is more salient. These main findings are robust to various sensitivity tests.

12
We also control for the existence of these financial stakeholders in Tables 4 to 9 analyses and find that the main
thrust of our results is unaltered.

30

 This paper is consistent with the view that workers have a debtholder-like risk-averse

utility function (Chen et al., 2012), a view that is rarely supported in prior empirical studies.

Prior studies instead regard labor unions as rent-seekers and mostly document that strong labor

unions are value-destroying. However, our evidence shows that labor unions play a certain

monitoring role with regard to managers investment activities if managerial decisions have

long-term consequences that might threaten corporate sustainability and, thus, the job security of

workers. Our results also imply that, when labor unions are able to exert greater influence on

management or their incentives are better aligned with those of other stakeholders, labor unions

disciplining role becomes more substantial.

Like other empirical studies, our research has limitations. Though we measure labor

union strength using the unionization rate, it is possible that the impact of labor unions,

especially on firms investment policy, can be material even in the absence of labor unions.

Moreover, our main assumption throughout the paper is that the leaders act in the best interest of

the members in the labor union. We acknowledge, however, the possibility of agency problem

for labor union leaders: they may pursue their own private benefits at the expense of their voters.

To the extent that the true level of labor union strength and other main variables of interest are

measured with errors by the adopted proxies, and to the extent that labor union leaders have

agency incentives, our reported results could be spurious. Notwithstanding, we believe that the

consistent results from various robustness analyses ameliorate these concerns and support the

claim of a positive relation between labor union strength and investment efficiency.

We also call for caution when readers interpret our results because the documented

results might not be generalized to other countries that have a different management-labor union

relationship. We acknowledge that the longstanding bargaining history of labor unions in Korea

31

has created a unique tradition of firm-level non-cooperativeness that is quite different from what

we see in Europe and the U.S. For example, labor unions in Korea have not benefited much from

politicians and business-friendly governments. In contrast, labor unions in Europe often

influence managerial decision-making through their supportive political connections. For

example, in some countries, labor unions are heavily intertwined with politics to exert voting

power in the design and/or implementation of laws that could impact managerial decision-

making. When labor unions can influence managerial decisions through other means (e.g.,

politics), they might have weaker incentives to do it through negotiations with the management.

Future research could focus on identifying a specific channel through which labor unions exert

influence on managerial decisions, and on a cross-country analysis of labor union strength that

varies across formal and informal institutions.

32

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35

Table 1. Variable Definitions

Variable Definitions
Urate unionization rate measured as the number of labor union members divided by
the number of total employees
Gurate the average Urate of other firms in the same business group excluding the Urate
of a focal firm
Over1 the indicator for the top quartile based on residuals where investments are
regressed on past sales growth
Under1 the indicator for the bottom quartile based on residuals where investments are
regressed on past sales growth
Over2 the indicator for the top quartile based on residuals where investments are
regressed on one-year lagged values of Q, CFO/TA, and sales growth
Under2 the indicator for the bottom quartile based on residuals where investments are
regressed on one-year lagged values of Q, CFO/TA, and sales growth
Cash_Lev the combined rank variable using cash reserves and leverage. In specific, we
sort firms into deciles based on cash balance (sum of cash and cash equivalents
scaled by total assets), and based on (-1)*leverage (sum of short-term and long-
term debts scaled by total assets). Then we take the average of the two decile
ranks after scaling each to fall between zero and one.
Investment (capital expenditures + R&D expenditures + acquisitions - sales of PPE) scaled
by lagged total assets
Log(Assets) natural logarithm of total assets
B/M book value of equity to the market value of equity
CFO/Sales operating cash flows divided by sales
OperCycle average accounts receivables (scaled by sales) + average inventory (scaled by
cost of goods sold)
Tangibility PPE divided by total assets
Loss an indicator variable that equals one if net income is negative, and zero
otherwise
(CFO) standard deviation of operating cash flows scaled by lagged total assets for
years t-3 to t-1
(Sales) standard deviation of the sales scaled by lagged total assets for years t-3 to t-1
(Investment) standard deviation of Investment scaled by lagged total assets for years t-3 to t-
1
Age the difference between the first year when the firm is established and the current
year
Dividend an indicator variable that equals one if the firm paid dividends, and zero
otherwise
Distress an indicator variable that equals one if the Altmans (1968) Z score is below
1.81, and zero otherwise. Altmans Z score is computed using the following
formula: Z = 1.2*(working capital/total assets) + 1.4*(retained earnings/total
assets) + 3.3*(earnings before interests and taxes/total assets) + 0.6*(market
value of equity/book value of total debt) + 1.0*(sales/ total assets).
Chaebol an indicator variable that equals one if the firm belongs to one of business

36

 conglomerates called chaebols, and zero otherwise. We obtain the list of firms
affiliated with chaebol from the Korea Fair Trade Commission (KFTC). The
KFTC defines a chaebol as a group of companies more than 30% of the shares
of which are owned by the groups controlling shareholders and their affiliated
companies.
SalesGrowth the annual change in sales deflated by lagged sales
Q Tobins q, estimated as the market value of equity minus the book value of
equity plus the book value of assets scaled by the book value of assets
CFO/TA operating cash flows divided by lagged total assets

37

Table 2. Summary Statistics

Variable Mean Std. Min Q1 Median Q3 Max

URate 0.477 0.283 0.000 0.259 0.560 0.755 0.823
Investment 0.028 0.042 -0.065 0.002 0.016 0.035 0.223
Q 1.061 0.697 0.102 0.737 0.971 1.145 8.865
CFO/TA 0.067 0.089 -0.144 -0.009 0.059 0.133 0.278
Log(Assets) 22.458 3.205 17.295 19.871 23.592 25.209 29.584
B/M 1.928 1.207 0.242 1.085 1.670 2.617 6.776
CFO/Sales 0.056 0.083 -0.226 -0.006 0.062 0.122 0.268
OperCycle 0.287 0.165 0.060 0.149 0.285 0.344 0.935
Tangibility 0.369 0.140 0.019 0.304 0.358 0.468 0.730
Loss 0.130 0.337 0.000 0.000 0.000 0.000 1.000
(CFO) 0.058 0.046 0.006 0.027 0.046 0.078 0.269
(Sales) 0.182 0.168 0.015 0.089 0.124 0.217 1.005
(Investment) 0.025 0.033 0.000 0.006 0.015 0.031 0.195
Age 40.990 12.539 7.000 34.000 39.000 54.000 64.000
Dividend 0.885 0.320 0.000 1.000 1.000 1.000 1.000
Distress 0.239 0.427 0.000 0.000 0.000 0.000 1.000
SalesGrowth 0.082 0.185 -0.443 -0.003 0.062 0.170 0.701
Chaebol 0.184 0.387 0.000 0.000 0.000 0.000 1.000

Note: This table presents summary statistics for the variables used in the analyses. See Table 1 for variable
definitions.

38

 Table 3. The Relation between Union Strength and Investment Efficiency

OLS regressions Multinomial Logistic regressions

(Dep. Var. = (Dep. Var. = Indicators for Over- (or Under-) investment)
total investment)
(1) (2) (3) (4) (5)
Baseline Dep. Var. = Over1 Dep. Var. = Dep. Var. = Over2 Dep. Var. =
Regression Under1 Under2
Coeff. t-value Coeff. p-value Coeff. p-value Coeff. p-value Coeff. p-value
Intercept n.a. 4.663*** 0.00 14.214*** 0.00 6.559*** 0.00 16.437*** 0.00
Urate -0.013** -2.55 -1.407*** 0.00 -1.225*** 0.00 -1.598*** 0.00 -1.571*** 0.00
Log(Assets) 0.002** 2.34 -0.258*** 0.00 -0.727*** 0.00 -0.322*** 0.00 -0.818*** 0.00
B/M (*10) 0.513 0.54 -0.674 0.25 0.266 0.65 -1.717*** 0.00 -1.541** 0.01
CFO/Sales 0.053*** 4.44 5.996*** 0.00 3.105*** 0.00 6.485*** 0.00 9.553*** 0.00
OperCycle -0.004 -0.57 0.795* 0.06 0.353 0.41 0.997** 0.02 0.538 0.22
Tangibility 0.011 1.40 2.595*** 0.00 1.075** 0.02 2.831*** 0.00 1.163** 0.02
Loss (*10) -1.576 -0.54 -8.692*** 0.00 -1.735 0.39 -9.977*** 0.00 -4.507** 0.03
(CFO) 0.063*** 2.94 2.650** 0.04 -2.090 0.15 3.511*** 0.01 -0.406 0.78
(Sales) -0.004 -0.74 -0.651* 0.06 -1.373*** 0.00 -0.376 0.30 0.305 0.37
(Investment) 0.082*** 2.79 1.749 0.32 1.174 0.50 -0.491 0.78 -2.423 0.18
Age 0.000*** -2.11 -0.025*** 0.00 -0.038*** 0.00 -0.031*** 0.00 -0.040*** 0.00
Dividend -0.002 -0.48 -0.505** 0.01 -0.376* 0.06 -0.478** 0.01 -0.231 0.26
Distress 0.003 1.38 1.437*** 0.00 1.410*** 0.00 1.562*** 0.00 1.653*** 0.00
SalesGrowth -0.004 -0.86 0.455 0.20 1.658*** 0.00 0.814** 0.02 1.979*** 0.00
Year Yes Yes Yes Yes Yes
Industry Yes Yes Yes Yes Yes
Obs. 2,904 2,904 2,904
(Pseudo)
Adj.R2 0.445 0.360 0.382

Note: This table presents the results for the effect of union strength on firms investment efficiency. Column (1)
presents the results from OLS regressions of corporate investment against the unionization rate and other
determinants. For this column, we run a firm-level fixed effect regression with year and industry dummies. Columns
(2) to (5) present the results from multinomial logistic regressions of indicators for over- or underinvestment against
the unionization rate and other determinants. The reference category of the dependent variable is no over- or
underinvestment. See Table 1 for variable definitions. t-values (or p-values) are based on standard errors adjusted
for heteroskedasticity using firm- and year-clustering (Peterson 2009; Gow et al. 2010). *, **, and *** indicate
significance at the two-tailed 10%, 5%, and 1% levels, respectively. Coefficients on year and industry dummies are
not reported for brevity. The coefficients on B/M and Loss are multiplied by 10.

39

Table 4. Influence of Chaebol Membership

(1) (2) (3) (4)

Dep. Var. = Over1 Under1 Over2 Under2

Coeff. p-value Coeff. p-value Coeff. p-value Coeff. p-value

Intercept 4.736*** 0.00 14.606*** 0.00 6.815*** 0.00 17.094*** 0.00
Urate -1.120*** 0.00 -1.058*** 0.00 -1.285*** 0.00 -1.303*** 0.00
Urate*Chaebol -1.797*** 0.00 -0.995* 0.10 -1.991*** 0.00 -1.664*** 0.01
Chaebol 0.965*** 0.00 0.843** 0.01 1.148*** 0.00 1.319*** 0.00
Log(Assets) -0.273*** 0.00 -0.752*** 0.00 -0.346*** 0.00 -0.860*** 0.00
B/M (*10) -0.547 0.35 0.323 0.58 -1.566*** 0.01 -1.434** 0.02
CFO/Sales 5.970*** 0.00 3.020*** 0.00 6.376*** 0.00 9.419*** 0.00
OperCycle 0.883** 0.03 0.395 0.36 1.117** 0.01 0.608 0.17
Tangibility 2.624*** 0.00 1.023** 0.03 2.873*** 0.00 1.116** 0.02
Loss (*10) -8.747*** 0.00 -1.591 0.43 -9.969*** 0.00 -4.305** 0.04
(CFO) 2.620* 0.05 -2.135 0.14 3.335** 0.01 -0.563 0.70
(Sales) -0.661* 0.06 -1.397*** 0.00 -0.393 0.28 0.298 0.38
(Investment) 1.852 0.29 1.134 0.52 -0.385 0.83 -2.402 0.18
Age -0.025*** 0.00 -0.037*** 0.00 -0.031*** 0.00 -0.039*** 0.00
Dividend -0.527** 0.01 -0.385* 0.05 -0.504** 0.01 -0.248 0.23
Distress 1.403*** 0.00 1.373*** 0.00 1.510*** 0.00 1.596*** 0.00
Chaebol 0.965*** 0.00 0.843** 0.01 1.148*** 0.00 1.319*** 0.00
SalesGrowth 0.440 0.20 1.660*** 0.00 0.818** 0.02 1.989*** 0.00
Year Yes Yes Yes Yes
Industry Yes Yes Yes Yes
Obs. 2,904 2,904
Pseudo R2 0.364 0.388

Note: This table presents the results for the moderating effect of chaebol affiliation on the relation between union
strength and investment efficiency. Columns (1) to (4) show the results from multinominal logistic regressions of
indicators for over- (or under-) investment against the unionization rate and its interaction with a chaebol dummy.
The reference category of the dependent variable is no over- or underinvestment. See Table 1 for variable definitions.
p-values are based on standard errors adjusted for heteroskedasticity using firm- and year-clustering (Peterson 2009;
Gow et al. 2010). *, **, and *** indicate significance at the two-tailed 10%, 5%, and 1% levels, respectively.
Coefficients on year and industry dummies are not reported for brevity. The coefficients on B/M and Loss are
multiplied by 10.

40

Table 5. Labor Unions in Affiliated Companies

(1) (2) (3) (4)

Dep. Var. = Over1 Under1 Over2 Under2

Coeff. p-value Coeff. p-value Coeff. p-value Coeff. p-value

Intercept 5.847 0.11 25.420*** 0.00 8.368** 0.03 24.891*** 0.00
Urate -0.833 0.22 -0.816 0.29 -1.479** 0.04 -1.640** 0.03
Gurate -0.356 0.51 -0.147 0.81 0.272 0.63 -0.079 0.90
Log(Assets) -0.264** 0.03 -0.958*** 0.00 -0.286** 0.02 -0.899*** 0.00
B/M (*10) -2.516* 0.07 -2.860* 0.08 -2.121 0.14 -1.005 0.52
CFO/Sales 4.300** 0.03 1.125 0.64 4.757*** 0.02 6.877*** 0.00
OperCycle 2.000* 0.09 -1.118 0.43 1.863 0.14 0.139 0.92
Tangibility 4.459*** 0.00 1.946 0.12 2.907** 0.01 1.084 0.38
Loss (*10) -1.224 0.80 -5.758 0.32 -7.098 0.16 -8.757 0.13
(CFO) 3.221 0.38 2.389 0.57 7.158* 0.05 6.729* 0.09
(Sales) 0.116 0.90 -2.230** 0.04 -0.811 0.40 -1.565 0.12
(Investment) 7.094 0.12 7.843 0.13 6.765 0.13 1.101 0.83
Age -0.006 0.58 0.004 0.78 -0.021* 0.07 -0.016 0.20
Dividend -0.193 0.67 0.174 0.75 -0.583 0.23 0.048 0.93
Distress 0.300 0.42 1.235*** 0.00 0.532 0.17 1.028** 0.01
SalesGrowth 0.142 0.86 2.532*** 0.01 0.612 0.46 2.461*** 0.01
Year Yes Yes Yes Yes
Industry Yes Yes Yes Yes
Obs. 533 533
Pseudo R2 0.419 0.419

Note: This table presents the results for the effect of unions of other member firms within the same business group
on a focal firms investment efficiency. Columns (1) to (4) show the results from multinomial logistic regressions of
indicators for over- (or under-) investment against the focal firms unionization rate (Urate) and the average
unionization rate of other firms within the same business group (Gurate). The reference category of the dependent
variable is no over- or underinvestment. See Table 1 for variable definitions. p-values are based on standard errors
adjusted for heteroskedasticity using firm- and year-clustering (Peterson 2009; Gow et al. 2010). *, **, and ***
indicate significance at the two-tailed 10%, 5%, and 1% levels, respectively. Coefficients on year and industry
dummies are not reported for brevity. The coefficients on B/M and Loss are multiplied by 10.

41

Table 6. The Role of Employee Stock Ownership Plan on the Relation between Union Strength and Investment Efficiency

Non-ESOP firms ESOP firms Non-ESOP firms ESOP firms

(1) (2) (3) (4) (5) (6) (7) (8)
Dep. Var. = Over1 Under1 Over1 Under1 Over2 Under2 Over2 Under2

Coeff. p Coeff. p Coeff. p Coeff. p Coeff. p Coeff. p Coeff. p Coeff. p

Intercept 9.014*** 0.00 18.688*** 0.00 -1.898 0.48 9.833*** 0.00 11.767*** 0.00 24.275*** 0.00 -5.251* 0.05 5.335* 0.06
Urate -1.931*** 0.00 -1.844*** 0.00 -1.250* 0.07 -0.282 0.69 -0.857* 0.06 -0.977** 0.03 -1.533** 0.03 -2.651*** 0.00
Log(Assets) -0.526*** 0.00 -1.000*** 0.00 0.145 0.22 -0.300** 0.02 -0.556*** 0.00 -1.145*** 0.00 0.363*** 0.00 -0.089 0.51
B/M -0.458 0.60 -1.167 0.19 -4.321** 0.03 -3.172 0.10 -0.652 0.49 -1.823* 0.06 -1.685 0.34 -3.138* 0.10
CFO/Sales 10.167*** 0.00 4.150*** 0.01 3.198 0.11 2.739 0.18 12.741*** 0.00 13.436*** 0.00 8.543*** 0.00 8.230*** 0.00
OperCycle -0.222 0.76 0.456 0.52 1.008 0.30 -0.310 0.77 -0.016 0.98 0.751 0.32 0.093 0.93 -3.493*** 0.00
Tangibility 2.642*** 0.00 2.790*** 0.00 0.840 0.41 -1.180 0.25 2.322*** 0.01 2.625*** 0.00 -0.125 0.90 -1.333 0.20
Loss -13.055*** 0.00 -9.330*** 0.00 1.495 0.77 3.620 0.48 -16.296*** 0.00 -12.631*** 0.00 5.684 0.27 5.885 0.29
(CFO) 8.217*** 0.00 -3.224 0.21 -5.722* 0.09 -6.205* 0.06 6.462*** 0.01 -1.567 0.54 -4.033 0.23 -12.343*** 0.00
(Sales) -0.598 0.26 -1.146** 0.05 -4.017*** 0.00 -4.115*** 0.00 -1.485*** 0.01 -1.330** 0.02 -4.714*** 0.00 -5.421*** 0.00
(Investment) -3.771 0.23 -0.373 0.90 7.025* 0.07 5.713 0.17 14.393*** 0.00 19.900*** 0.00 11.574*** 0.01 12.759*** 0.00
Age -0.024*** 0.01 -0.042*** 0.00 -0.040*** 0.00 -0.069*** 0.00 -0.032*** 0.00 -0.058*** 0.00 -0.046*** 0.00 -0.020 0.12
Dividend -0.111 0.74 0.216 0.53 -0.468 0.26 -0.528 0.20 -0.581* 0.08 0.505 0.16 -0.229 0.59 -0.220 0.61
Distress 2.714*** 0.00 2.377*** 0.00 0.744* 0.07 0.214 0.60 1.465*** 0.00 1.529*** 0.00 0.678 0.11 0.816* 0.06
SalesGrowth 2.016*** 0.00 4.270*** 0.00 -0.389 0.69 -2.061** 0.04 3.224*** 0.00 4.299*** 0.00 -0.477 0.63 -0.714 0.48
Year Yes Yes Yes Yes Yes Yes Yes Yes
Industry Yes Yes Yes Yes Yes Yes Yes Yes
Obs. 1,811 642 1,811 642
Pseudo R2 0.497 0.428 0.509 0.460

Difference of Urate between Non-ESOP and ESOP firms

Over1 p = 0.20
Under1 p = 0.03
Over2 p = 0.21
Under2 p = 0.03

Note: This table presents the results for the differential effect of union strength on firms investment efficiency across ESOP and non-ESOP firms. Columns (1) to (8) show the
results from multinomial logistic regressions of indicators for over- (or under-) investment against the unionization rate, which are conducted separately for ESOP and non-ESOP
firms. The reference category of the dependent variable is no over- or underinvestment. See Table 1 for variable definitions. p-values are based on standard errors adjusted for
heteroskedasticity using firm- and year-clustering (Peterson 2009; Gow et al. 2010). *, **, and *** indicate significance at the two-tailed 10%, 5%, and 1% levels, respectively.
Coefficients on year and industry dummies are not reported for brevity. The coefficients on B/M and Loss are multiplied by 10.

42

Table 7. Accounting for Endogeneity: Instrumental Variable Approach

OLS regression OLS regressions Multinomial Logistic regressions

(Dep. Var. = Urate) (Dep. Var. = (Dep. Var. = Indicators for Over- (or Under-) investment)
total investment)
(1) (2) (3) (4) (5) (6)
1st stage Baseline Dep. Var. = Over1 Dep. Var. = Under1 Dep. Var. = Over2 Dep. Var. = Under2
for IV approach Regression
Coeff. t-value Coeff. t-value Coeff. p-value Coeff. p-value Coeff. p-value Coeff. p-value
Intercept -0.457*** -7.27 n.a. 2.263* 0.09 12.179*** 0.00 3.956*** 0.00 14.516*** 0.00
Female -0.182*** -7.12
Urate -0.130* -1.93 -5.929*** 0.00 -5.247*** 0.01 -6.331*** 0.00 -5.195*** 0.00
Log(Assets) 3.126*** 11.77 0.006** 2.46 -0.109 0.14 -0.601*** 0.00 -0.162** 0.03 -0.700*** 0.00
B/M (*10) -0.067 -1.64 -0.309 -0.29 -0.940 0.12 0.006 0.92 -2.020*** 0.00 -1.728*** 0.00
CFO/Sales -0.110** -2.01 0.038*** 2.71 5.400*** 0.00 2.547*** 0.00 5.808*** 0.00 9.041*** 0.00
OperCycle -0.009 -0.31 -0.006 -0.76 0.744* 0.07 0.290 0.50 0.968** 0.02 0.492 0.26
Tangibility 19.658*** 6.04 0.034** 2.19 3.383*** 0.00 1.828*** 0.00 3.610*** 0.00 1.790*** 0.00
Loss (*10) -0.109 -0.77 -2.235 -0.74 -9.277*** 0.00 -2.248 0.26 -1.067*** 0.00 -5.079** 0.02
(CFO) 0.375*** 4.12 0.109*** 3.28 4.401*** 0.00 -0.522 0.75 5.411*** 0.00 1.066 0.52
(Sales) -0.049** -2.10 -0.009 -1.46 -0.851** 0.02 -1.608*** 0.00 -0.592 0.11 0.082 0.82
(Investment) -0.193 -1.57 0.054* 1.70 0.456 0.80 -0.104 0.95 -1.568 0.39 -3.126* 0.10
Age 0.004*** 12.29 0.000 0.87 -0.005 0.60 -0.020* 0.05 -0.010 0.33 -0.023** 0.03
Dividend 0.016 1.22 0.001 0.17 -0.402** 0.04 -0.282 0.16 -0.368* 0.06 -0.147 0.48
Distress 0.008 0.75 0.004 1.58 1.515*** 0.00 1.465*** 0.00 1.645*** 0.00 1.699*** 0.00
SalesGrowth 0.025 1.08 -0.001 -0.25 0.603* 0.09 1.779*** 0.00 0.969*** 0.01 2.063*** 0.00
Year Yes Yes Yes Yes Yes Yes
Industry Yes Yes Yes Yes Yes Yes
Obs. 2,903 2,903 2,903 2,903
(Pseudo) Adj.R2 0.533 0.445 0.355 0.375

Note: This table presents the results for addressing the endogeneity of unionization rate using 2SLS. The unionization rate (Urate) is instrumented by the female
worker ratio (Female). Column (1) presents the results from the first stage OLS regression of unionization rate against Female and other determinant variables.
Column (2) presents the results from the second stage OLS regression of corporate investment against the fitted value of the unionization rate from the first stage
regression in Column (1) and other determinants. Columns (3) to (6) present the results from the second stage multinomial logistic regressions of indicators for

43

over- (or under-) investment against the fitted value of the unionization rate from the first stage regression in Column (1) and other determinants. The reference
category of the dependent variable is no over- or underinvestment. See Table 1 for variable definitions. t-values (or p-values) are based on standard errors
adjusted for heteroskedasticity using firm- and year-clustering (Peterson 2009; Gow et al. 2010). *, **, and *** indicate significance at the two-tailed 10%, 5%,
and 1% levels, respectively. Coefficients on year and industry dummies are not reported for brevity. The coefficients on B/M and Loss are multiplied by 10.

44

Table 8. Conditional Regressions

Panel A. Conditional Regressions for Table 3: Basic Analysis

Dep. Var. = total investment Coeff. t-value

Urate 0.016* 1.80
Cash_Lev 0.031*** 4.07
Urate*Cash_Lev -0.058*** -4.09
Log(Assets) 0.003*** 2.96
B/M (*10) 0.004 0.46
CFO/Sales 0.046*** 3.70
OperCycle -0.001 -0.11
Tangibility 0.014* 1.70
Loss (*10) -0.003 -0.12
(CFO) 0.067*** 3.00
(Sales) -0.001 -0.19
(Investment) 0.093*** 3.16
Age 0.000*** -2.61
Dividend -0.002 -0.65
Distress 0.003 1.08
SalesGrowth -0.003 -0.70
Year Yes
Industry Yes
Obs. 2,904
(Pseudo) Adj.R2 0.450

45

Panel B. Conditional Regressions for Table 4: Interaction with Chaebol

Dep. Var. = total investment Coeff. t-value

Urate 0.012 1.28
Cash_Lev 0.021*** 2.62
Urate*Cash_Lev -0.040** -2.57
Chaebol -0.010 -0.92
Urate* Chaebol 0.018 0.90
Urate*Cash_Lev* Chaebol -0.098*** -2.86
Cash_Lev* Chaebol 0.053*** 2.92
Log(Assets) 0.002** 2.16
B/M (*10) 0.007 0.75
CFO/Sales 0.044*** 3.53
OperCycle 0.000 -0.06
Tangibility 0.014* 1.72
Loss (*10) -0.006 -0.22
(CFO) 0.069*** 3.11
(Sales) -0.001 -0.24
(Investment) 0.090*** 3.06
Age 0.000*** -2.61
Dividend -0.002 -0.62
Distress 0.002 0.93
SalesGrowth -0.004 -0.84
Year Yes
Industry Yes
Obs. 2,904
(Pseudo) Adj.R2 0.452

46

Panel C. Conditional Regressions for Table 5: Labor Unions in Affiliated Firms

Dep. Var. = total investment Coeff. t-value

Urate 0.034 1.56
Cash_Lev 0.088*** 3.98
Urate*Cash_Lev -0.079** -2.23
Gurate 0.037 1.87
Urate* Gurate -0.046 -1.58
Log(Assets) 0.002 0.99
B/M (*10) -0.011 -0.51
CFO/Sales 0.030 0.95
OperCycle 0.020 0.80
Tangibility 0.051** 2.39
Loss (*10) 0.098 1.38
(CFO) 0.120* 1.85
(Sales) 0.012 0.78
(Investment) 0.079 1.03
Age -0.001** -1.97
Dividend 0.002 0.25
Distress 0.001 0.14
SalesGrowth -0.005 -0.40
Year Yes
Industry Yes
Obs. 533
(Pseudo) Adj.R2 0.594

47

Panel D. Conditional Regressions for Table 6: Effect of ESOP

(1) Non-ESOP firms (2) ESOP firms

Dep. Var. = total investment Coefficient t-value Coefficient t-value
Urate 0.021* 1.87 0.069*** 2.95
Cash_Lev 0.031*** 2.97 0.068*** 3.50
Urate*Cash_Lev -0.069*** -3.90 -0.172*** -4.12
Log(Assets) 0.002* 1.83 0.011*** 3.79
B/M (*10) 0.060*** 4.86 0.003 0.84
CFO/Sales 0.102*** 6.06 0.042 1.10
OperCycle -0.028*** -2.62 0.044** 2.02
Tangibility 0.010 0.91 0.006 0.24
Loss (*10) 0.020 0.61 0.100 1.20
(CFO) 0.083** 2.47 0.017 0.25
(Sales) -0.002 -0.31 -0.020 -1.16
(Investment) 0.076* 1.85 0.134* 1.79
Age 0.000* -1.81 -0.001** -2.23
Dividend 0.002 0.35 -0.008 -0.98
Distress 0.005* 1.77 -0.027*** -3.52
SalesGrowth 0.010 1.36 0.004 0.21
Year Yes Yes
Industry Yes Yes
Obs. 1,811 642
Adj.R2 0.490 0.735

Difference between Columns (1) and (2) of Urate: p-value = 0.04

Difference between Columns (1) and (2) of Urate*Cash_Lev: p-value = 0.01

48

Panel E. Conditional Regressions for Table 7: Instrumental Variable Approach

Dep. Var. = total investment Coeff. t-value

Urate -0.079 -1.16
Urate*Cash_Lev -0.124*** -5.27
Cash_Lev 0.059*** 5.32
Log(Assets) 0.007*** 3.00
B/M (*10) -0.005 -0.44
CFO/Sales 0.028* 1.95
OperCycle -0.006 -0.80
Tangibility 0.038** 2.42
Loss (*10) -0.005 -0.17
(CFO) 0.116*** 3.47
(Sales) -0.007 -1.17
(Investment) 0.073** 2.31
Age 0.000 0.85
Dividend 0.000 0.09
Distress 0.002 0.96
SalesGrowth -0.002 -0.30
Year Yes
Industry Yes
Obs. 2,903
(Pseudo) Adj.R2 0.451

Note: This table presents the results of repeating the analyses in Tables 3 to 7 using conditional specification, which
tests the effect of union strength on firms investment efficiency conditional on the likelihood of overinvestment
(Cash_Lev). Panel A presents the results of repeating the analysis from Table 3, obtained from OLS regressions of
corporate investment against the unionization rate, its interaction with the likelihood of overinvestment, and other
determinants. Panel B presents the results of repeating the analysis from Table 4, obtained from OLS regressions of
corporate investment against unionization rate, its interaction with the likelihood of overinvestment, and their three-
way interactions with the Chaebol dummy. Panel C presents the results of repeating the analysis from Table 5,
obtained from OLS regressions of corporate investment against the focal firms unionization rate, the average
unionization rate of other firms within the same business group, and their interactions with the likelihood of
overinvestment. Panel D presents the results of repeating the analysis from Table 6, obtained from OLS regressions
of corporate investment against unionization rate and its interaction with the likelihood of overinvestment, which are
conducted separately for ESOP and non-ESOP firms. Panel E presents the results of repeating the analysis from
Table 7, the second stage OLS regression results for addressing the endogeneity of the unionization rate using 2SLS,
where the instrumental variable for unionization rate is the female worker ratio (Female). The result for the first
stage OLS regression of the unionization rate against Female and other determinant variables is reported in Column
(1) of Table 7. We run firm-level fixed effect regressions with year and industry dummies. See Table 1 for variable
definitions. t-values are based on standard errors adjusted for heteroskedasticity using firm- and year-clustering
(Peterson 2009; Gow et al. 2010). *, **, and *** indicate significance at the two-tailed 10%, 5%, and 1% levels,
respectively. Coefficients on year and industry dummies are not reported for brevity. The coefficients on B/M and
Loss are multiplied by 10.

49

Table 9. Value Implication of Investment in Unionized Firms

(1) (2)
Dep. Var. =
ROAt+1 Qt
Coefficient t-value Coefficient t-value
Urate 0.011 1.76 -0.042 -1.06
Investment 0.001 0.04 0.142 0.79
Urate* Investment 0.006 0.09 1.392*** 3.35
Log(Assets) -0.001 -0.56 0.034*** 5.44
B/M (*10) -0.025** -2.24 -0.148*** -21.22
(CFO) -0.066*** -2.62 -0.371** -2.38
Age -0.001*** -6.22 -0.008*** -9.69
Distress -0.013*** -4.77 0.139*** 8.32
Chaebol 0.008* 1.68 0.001 0.05
ROA 0.227*** 9.12 -0.435*** -2.79
Year Yes Yes
Industry Yes Yes
Obs. 2,904 2,904
Adj.R2 0.509 0.664

Note: This table presents the results from OLS regressions of future performance or firm value on the unionization
rate, investment, and their interactions. For all columns, we run firm-level fixed effect regressions with year and
industry dummies. See Table 1 for variable definitions. t-values are based on standard errors adjusted for
heteroskedasticity using firm- and year-clustering (Peterson 2009; Gow et al. 2010). *, **, and *** indicate
significance at the two-tailed 10%, 5%, and 1% levels, respectively. Coefficients on year and industry dummies are
not reported for brevity. The coefficient on B/M is multiplied by 10.

50