Hostname: page-component-8448b6f56d-c47g7 Total loading time: 0 Render date: 2024-04-19T04:28:55.460Z Has data issue: false hasContentIssue false
  • English
  • Français

When Labor Has a Voice in Corporate Governance

Published online by Cambridge University Press:  06 April 2009

Olubunmi Faleye ,
Vikas Mehrotra  and
Randall Morck
Olubunmi Faleye
Affiliation:
o.faleye@neu.edu, Finance & Insurance Group, College of Business Administration, Northeastern University, 360 Huntington Avenue, Boston, MA 02115
Vikas Mehrotra
Affiliation:
vmehrotr@ualberta.ca, Department of Finance & Management Science, School of Business, University of Alberta, Edmonton, AB, Canada T6G 2R6.
Randall Morck
Affiliation:
randall.morck@ualberta.ca, Department of Finance & Management Science, School of Business, University of Alberta, Edmonton, AB, Canada T6G 2R6.
Get access Rights & Permissions [Opens in a new window]

Abstract

Equity ownership gives labor both a fractional stake in a firm's residual cash flows and a voice in corporate governance. Relative to other firms, labor-controlled publicly traded firms deviate more from value maximization, invest less in long-term assets, take fewer risks, grow more slowly, create fewer new jobs, and exhibit lower labor and total factor productivity. Therefore, we propose that labor uses its corporate governance voice to maximize the combined value of its contractual and residual claims, and that this often pushes corporate policies away from, rather than toward, shareholder value maximization.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 41 , Issue 3 , September 2006 , pp. 489 - 510
Copyright
Copyright © School of Business Administration, University of Washington 2006

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aoki, M.The Cooperative Game Theory of the Firm. Oxford, England: Oxford Univ. Press (1984).Google Scholar
Beatty, A. “The Cash Flow and Informational Effects of Employee Stock Ownership Plans.” Journal of Financial Economics, 38 (1995), 211–240.CrossRefGoogle Scholar
Bethel, J. E.; Liebeskind, J. P.; and Opler, T.. “Block Share Purchases and Corporate Performance.” Journal of Finance, 53 (1998), 605–634.Google Scholar
Bloom, S. “Employee Ownership and Firm Performance.” Ph.D. Dissertation, Harvard Univ. (1986).Google Scholar
Callahan, W. T.; Millar, J. A.; and Schulman, C.. “An Analysis of the Effect of Management Participation in Director Selection on the Long-Term Performance of the Firm.” Journal of Corporate Finance, 9 (2003), 169–181.CrossRefGoogle Scholar
Chan, S. H.; Martin, J. D.; and Kensinger, J. W.. “Corporate Research and Development Expenditures and Share Value.” Journal of Financial Economics, 26 (1990), 255–276.Google Scholar
Chang, S. “Employee Stock Ownership Plans and Shareholder Wealth: An Empirical Investigation.” Financial Management, 19 (1990), 48–58.Google Scholar
Chang, S., and Mayers, D.. “Managerial Vote Ownership and Shareholder Wealth: Evidence from Employee Stock Ownership Plans.” Journal of Financial Economics, 32 (1992), 103–131.Google Scholar
Chaplinsky, S., and Niehaus, G.. “The Tax and Distributional Effects of Leveraged ESOPs.” Financial Management, 19 (1990), 29–38.CrossRefGoogle Scholar
Chung, K. H., and Pruitt, S. W.. “A Simple Approximation of Tobin's q.” Financial Management, 23 (1994), 70–74.Google Scholar
Drucker, P. F.The Future of Industrial Man: A Conservative Approach. New York, NY: The John Day Company (1978).Google Scholar
Eberhart, A. C.; Maxwell, W. F.; and Siddique, A. R.. “An Examination of Long-Term Abnormal Stock Returns and Operating Performance Following R&D Increases.” Journal of Finance, 59 (2004), 623–650.CrossRefGoogle Scholar
Fama, E., and Jensen, M. C.. “Separation of Ownership and Control.” Journal of Law & Economics, 26 (1983), 327–349.CrossRefGoogle Scholar
Faria, H. J.; Trahan, E.; and Rogers, R. C.. “ESOPs in Public Companies: Firm Characteristics, Shareholder Wealth, and Impact on Performance.” Journal of Employee Ownership Law and Finance, 5 (1993), 75–92.Google Scholar
Garvey, G. T., and Swan, P. L.. “The Economics of Corporate Governance: Beyond the Marshallian Firm.” Journal of Corporate Finance, 1 (1994), 139–174.Google Scholar
Gordon, L., and Pound, J.. “ESOPs and Corporate Control.” Journal of Financial Economics, 27 (1990), 525–555.CrossRefGoogle Scholar
Hartzell, J. C., and Starks, L. T.. “Institutional Investors and Executive Compensation.” Journal of Finance, 58 (2003), 2351–2374.Google Scholar
Jensen, M. C. “Agency Costs of Free Cash Flows, Corporate Finance and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Jensen, M. C., and Meckling, W. H.. “Rights and Production Functions: An Application to Labor-Managed Firms and Codetermination.” Journal of Business, 52 (1979), 469–506.CrossRefGoogle Scholar
Lougee, B. “An Empirical Investigation of the Implications of Employee Ownership for the Agency Problem and the Information Content of Earnings.” Ph.D. Dissertation, Cornell Univ. (1999).Google Scholar
McConnell, J. J., and Muscarella, C. J.. “Corporate Capital Expenditure Decisions and the Market Value of the Firm.” Journal of Financial Economics, 14 (1985), 399–422.CrossRefGoogle Scholar
McElrath, R. G., and Rowan, R. L.. “The American Labor Movement and Employee Ownership: Objections to and Uses of Employee Stock Ownership Plans.” Journal of Labor Research, 13 (1992), 99–120.Google Scholar
McKersie, R. B. “Union-Nominated Directors: A New Voice in Corporate Governance.” Working Paper, MIT (1999).Google Scholar
Morck, R.; Shleifer, A.; and Vishny, R.. “Managerial Ownership and Market Valuation: An Empirical Analysis.” Journal of Financial Economics, 20 (1988), 293–315.CrossRefGoogle Scholar
Morck, R.; Shleifer, A.; and Vishny, R.. “Alternative Mechanisms for Corporate Control.” American Economic Review, 89 (1989), 842–852.Google Scholar
Park, S., and Song, M. H.. “Employee Stock Ownership Plans, Firm Performance, and Monitoring by Outside Blockholders.” Financial Management, 24 (1995), 52–65.CrossRefGoogle Scholar
Rechner, P. L., and Dalton, D. R.. “CEO Duality and Organizational Performance: A Longitudinal Analysis.” Strategic Management Journal, 12 (1991), 155–160.Google Scholar
Rosenstein, S., and Wyatt, J.. “Outside Directors, Board Independence, and Shareholder Wealth.” Journal of Financial Economics, 26 (1990), 175–192.Google Scholar
Scholes, M., and Wolfson, M.. “Employee Stock Ownership Plans and Corporate Restructuring: Myths and Reality.” Financial Management, 19 (1990), 12–28.CrossRefGoogle Scholar
Stulz, R. “Managerial Control of Voting Rights, Financing Policies, and the Market for Corporate Control.” Journal of Financial Economics, 20 (1988), 25–54.Google Scholar
Vanek, J.General Equilibrium of International Discrimination: The Case of Customs Unions. Cambridge, MA: Harvard Univ. Press (1965).Google Scholar
Yermack, D. “Higher Market Valuation of Companies with a Small Board of Directors.” Journal of Financial Economics, 40 (1996), 185–213.Google Scholar