Corporate managers tend to view labor unions as presenting substantial operational threats, as strikes can disrupt production and lead to stockouts. Therefore, managers make decisions to mitigate such risks, and they use various strategies including providing pessimistic disclosures to preserve their bargaining power against labor unions. One important way they do so, say HKUST researcher Dr. Daniel G. Yang and colleagues, is by stockpiling inventory. Their novel findings highlight the importance of labor as a major stakeholder in managers’ investment decision-making.
“Understanding inventory holding decisions in unionized firms,” the researchers say, “is particularly important because stockouts due to strikes and opportunity costs from lost sales are the primary threats from labor unions.” The researchers explore two instances in which the relative cost of disclosure strategies increases, which motivates managers to stockpile inventory: capital market pressure for information transparency and peer firm disclosure. They use a sample of all U.S. manufacturing firm-years for 1983–2017 to measure the existence and strength of labor unions.
The researchers find that, consistent with their prediction, firms with strong labor unions tend to hold higher levels of inventory. “Excess inventory makes a strike both less likely and less costly,” they say, “giving managers more bargaining power in labor relations.” They also find that “inventory stockpiling at union firms is more salient when capital market pressure for transparency or information spillover from peers constrains managers from using disclosure strategies.”
Preventing costly stockouts from a strike is the primary benefit of inventory stockpiling, the researchers say. They find that “inventory stockpiling at union firms is more pronounced when the expected stockout costs are higher.” Their analysis yielded another important finding. “When a strike does occur, the stock market reacts less adversely to firms that increased their inventory prior to the strike.”
The researchers’ findings make multiple contributions to the accounting field. First, whereas previous studies find that various stakeholders, such as suppliers and customers, affect managers’ inventory holding decisions, the researchers highlight another important stakeholder with a strong leverage: labor unions. They show that “for managers negotiating with labor unions, inventory management can be a key source of bargaining power when capital market demands high-quality disclosure.” Managers “weigh the costs and benefits of inventory stockpiling,” the researchers explain, as “holding excess inventory due to the presence of a union is negatively associated with future profitability but provides the benefits of avoiding a stockout and mitigating negative outcomes from a strike.”
Second, the researchers show that incentives arising from labor unions on inventory and production decisions are distinct from real earnings management incentives that prior research has documented. “Overall,” they say, “our study suggests that the economic effect of labor unions may be an important parameter in providing balanced information in financial statement analyses with respect to inventory management.”
These important findings, the researchers conclude, deepen “our understanding of how managers jointly consider various reporting and operational strategies to maintain their bargaining power against unions while achieving financial reporting goals.”