Unionization and Firm Inventory Management Empirical Evidence

Motivation: Prior literature reveals that unionizations have a significant effect on firm performance and decision making. In this paper, we explore whether and to what extent the union elections shape firm policy on inventory management. Premise: This paper focuses on the causal effects of unionization on firm investment in inventory. We argue that the theoretical predictions on firm inventory policy following union election events are mixed, which necessitates empirical investigation of the relation between unionization and firm inventory management. Approach: We implement the regression discontinuity approach with the union election vote data from 1980 to 2010. We perform a host of sensitivity tests to ensure that our findings are robust. Results: We document that firms with union election wins have significantly lower inventory levels. This negative relation is more prominent for firms that have higher labor costs, less operational flexibility, and are financially constrained. Our findings also indicate that firms in states with stronger labor rights or with higher labor intensity arc associated with lower inventory investment after successful union elections. We further find that firms with union election wins significantly improve their operating efficiency through higher inventory turnovers. Firms tend to shift from bank credit to trade credit to finance their inventory after the unionization. Conclusion: In response to rising labor costs, operating inflexibility, and financial constraints caused by the union formation, firms choose to reduce their inventory level with the incentives to balance cost, speed up inventory turnover, and save internal capital for future investments. Consistency: This paper demonstrates that unionization is one critical factor in corporate inventory management. With the trade-off between inventory holding and shortage risks, firms are more inclined to lean inventory policies to mitigate the costs and risks of unionization.