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*John Dinardo is Professor of Economics and Pub- Group Conference at Michigan State University for
lic Policy, University of Michigan, and Kevin F. Hallock discussions and suggestions. Matthew Artz and Xiang
is Associate Professor of Economics and of Labor and Yi provided excellent research assistance. For finan-
Industrial Relations, University of Illinois at Urbana- cial support, the authors thank the Institute of Labor
Champaign. The authors thank Orley Ashenfelter, and Industrial Relations at the University of Illinois.
Sherrilyn Billger, Dale Belman, Richard Block, Kevin They are also extremely grateful to Margaret Chaplan
Denny, Benjamin Gordon, Wallace Hendricks, Mar- and Katie Dorsey from the Industrial Relations Li-
garet Chaplan, Mark Moore, Larry Neal, Martin brary at the University of Illinois for their help in
Wagner, and participants at the Ninth Bargaining identifying and locating data.
Industrial and Labor Relations Review, Vol. 55, No. 2 (January 2002). © by Cornell University.
0019-7939/00/5502 $01.00
219
220 INDUSTRIAL AND LABOR RELATIONS REVIEW
Given our focus on strikes, our paper is ings streams would be quite small. Given
directly related to two literatures. In one the considerable evidence that the mea-
(see Neumann and Reder 1984), the effect sured change in market values of firms
of strikes on industry-wide output is mea- resulting from strikes is not negligible (for
sured using industry-wide measures such as example, Becker and Olson 1986; Neumann
inventories and shipments. In another, the 1980; Ruback and Zimmerman 1984), how-
lost value associated with strikes is mea- ever, we follow the earlier literature and
sured using data on market valuation (see, assume that it is meaningful to investigate
for example, Ruback and Zimmerman the presence of such an effect.
1984). This literature is closely related to Once we turn our attention away from
the “event study” literature in finance and the single firm and consider the entire
has focused exclusively on using stock mar- industry, we must consider the effect of
ket returns from individual firms. At its union bargains on non—unionized firms
most basic level, our approach is a combi- or those not immediately party to the con-
nation of these two approaches. Like the tract negotiations.1 One’s a priori view of
firm-level studies, our study uses informa- the sign and magnitude of these indirect
tion from the capital markets; unlike that effects depends on the mechanism by which
literature, but in common with the litera- unions (in this historical context) raise
ture on the “industry-wide” effect of strikes, wages. If a “successful” strike is one result-
our study focuses on broadly defined indus- ing in a one-time “permanent” change in
trial aggregates. the share of the surplus going to workers,
Our study, therefore, begins with the the strike’s effect on the value of the firm
premise that the extent of union effects is will be proportional to the change in prof-
potentially easier to detect when changes its going to the firm. The effect on indus-
in unionization are large and important trial activity at large will be small to the
than when they are modest. Toward that extent that the strike’s effects are limited
end, we focus on the period between the exclusively to the struck firm and the firm’s
two World Wars, an important time for the share of output is small.
U.S. labor movement. After witnessing a To prepare the way for our empirical
prodigious and rapid increase in member- analysis, consider the extreme case in which
ship at the end of the nineteenth century, wage bargains reached by unions accrue to
American unionism experienced a decline all workers in an industry. 2 Again for sim-
of almost equal magnitude in the period plicity, we assume a constant real rate of
leading up to the first World War. The interest r. Before the strike, the industry
ferocity of business and government hostil- faces a probability π of a one-time perma-
ity to the attempt to organize American nent change in firm value due to the union
workers left little doubt about the impor- calling a strike and winning.3 If we denote
tance of the struggle. As we will argue earnings in a given time period by D and
below, this period and the period leading the percentage change in the share going
up to World War II provide a unique time to to the firm by –δ, the value of the firm prior
investigate the impact of strikes on firms. to the strike decision is
Analytical Framework
At first glance, it might be surprising to 1
See Lazear (1983) for some of the subtleties in-
find any effect of strike activity on industry- volved.
wide stock prices. The first puzzle involves 2
The presentation could be made more realistic by
why strikes should have any effect on the considering a finite time horizon or the possibility of
future union wins or losses, but this would merely
returns of individual firms. In the context complicate the expressions without contributing ad-
of an infinitely long-lived firm, and when ditional insight.
strikes have no effect on the terms of trade, 3
1 – π, then, is the probability that the union does
the change in the value of discounted earn- not call a strike or calls one and loses.
IMPACT OF STRIKES ON FINANCIAL MARKETS, 1925–1937 221
(1) E[V0] = π ∫ 0∞ e –rtD(1 – δ)dt + teresting to compare our results with those
∞ of studies using data from a much more
(1 – π)∫ 0 e–rtDdt
recent time period. Several such studies
If the union strikes and wins, the value of are noteworthy. Becker and Olson (1986),
the firm is merely in a comprehensive study of the impact of
∞ strikes on individual firm stock prices from
(2) V union strikes and wins = ∫ 0 e–rtD(1 – δ)dt 1962 to 1982, found that the average large
The percentage change in the value of the strike was associated with a 4.1% decline in
firm (or log difference) when the union stock prices.4 Persons (1995) found that
wins is then given by the share price reaction to struck automo-
bile producers and steel suppliers was
(3) Percent change in around 1.6% on the days around the strike.
the value of the firm = Neumann (1980) found a share price reac-
tion of about 0.5% on the day of an an-
log(E[V0]) – log(V union strikes and wins)
nounced strike for a sample of firms struck
1 – δπ in the late 1960s and mid-1970s.5 Using
= log ( ) Canadian data, Nelson et al. (1994) studied
1–δ
124 strikes between January 1983 and July
≈ (1 – π)δ 1989 and found a loss in stock price of
about 1% for the 5-day window around the
This expression has a simple interpreta- strike.6 Although each of these studies
tion. The percentage change in the value used a different time period, sample of
of the firm when the union strikes and wins strikes, and event window, they all suggest a
an important fight is equal to the product negative share price reaction of between
of the probability that the union loses or 1% and 4% around the start of the strike.
does not strike at all (1 – π) and the fraction A goal of our work is to assess the impact
of earnings that flow away from sharehold- of strikes on industry stock prices during
ers toward workers (δ). If firms completely the interwar period. As a practical matter,
anticipated a union strike and victory (π = the most straightforward way to do so would
1) and this information were already incor- be merely to examine industry stock re-
porated into the value of the firm, a strike turns before and after the strike and then
would have no effect on excess returns. attribute the entire stock price change to
The analysis is completely symmetric for the effects of the strike. The problem with
the case in which the union does not strike such a comparison is that it implicitly as-
or strikes and loses. In this case, the magni- sumes that had the strike not occurred, indus-
tude of the measured effect of union losses try returns after the strike ended would
on stock prices will be largest when the have been exactly equal to industry returns
probability firms attach to a union loss is just before the strike—an assumption that
small. The measured effect of a union loss is justifiable only in the improbable case
on stock returns will be small whenever a that general economy-wide conditions were
union defeat is likely. Put differently, the
revision to stock prices depends not only
on the direct effect of the union loss (or
other event) on the firm’s “bottom line” 4
The Center for Research in Security Prices (CRSP)
(δ) but also on how surprising the event is at the University of Chicago only published daily
(π). stock prices after 1962. All of the previous studies
We focus on the relationship between concentrated on years after this date.
5
strikes and industry stock prices during the Neumann (1980) went on to suggest that the
period between the World Wars because stock market seems to have predicted the occurrence
of strikes quite well during this period.
this is a time viewed as very important in 6
Also see Kramer and Vasconcellos (1996),
labor history by labor historians and other Davidson et al. (1988), and Ruback and Zimmerman
informed observers. Nevertheless, it is in- (1984) for related studies.
222 INDUSTRIAL AND LABOR RELATIONS REVIEW
unchanging during the strike period. A a period preceding the strike is to avoid
more realistic analysis generates an assess- potential contamination of our counter-
ment of the movement of stock prices that factual by expectations of a strike.
would have occurred in the absence of the strike. With our estimates of the counterfactual
This counterfactual can then be compared in hand, the next step is to compute the
to the actual behavior of stock prices to following for each month around the event
generate an estimate of the strike’s effect. date:
One approach to making such a com-
(7) ERit = Rit – R̂it ,
parison, and the one we use in this paper, is
often referred to as “the event study where ERit (usually called the “excess re-
method.” It has been widely used in indus- turn”) for each industry i for each month t
trial relations research, including, for ex- is merely the difference between the actual
ample, Becker and Olson (1986) and return R it and the predicted return R̂it . In
Abowd, Milkovich, and Hannon (1990). As the absence of a strike, the average of ERit
the technical aspects of the method we should clearly equal zero.
employ are carefully described in Brown The excess returns calculated for each
and Warner (1985), Campbell, Lo, and month around the start of a strike are used
MacKinlay (1997), Fama et al. (1969), and to form the average excess returns for each
MacKinlay (1997), we will describe the ba- strike. These are easily computed by aver-
sic ideas only briefly. aging the monthly excess returns for each
We begin by concentrating on the effect strike. We also compute “cumulative” ex-
of a strike around the strike’s start. Cumu- cess returns by adding monthly excess re-
lative average excess returns are calculated turns for various intervals (called event
using the simple method outlined below. “windows”) around the date of the strike.
Let t index time in trading months, let s Cumulative average excess returns are
indicate the “event month” (the month of merely the average of these cumulative ex-
the start of the strike), and let i indicate cess returns across all strikes.
industries. First the industry monthly stock The precise statistic used to assess
return, R it , is regressed on Rmt , the average whether average excess returns or cumula-
market return for month t, which we also tive excess returns are “statistically signifi-
collected from the Cowles (1938) data. This cant” are discussed in Campbell, Lo, and
regression, MacKinlay (1997). These tests proceed by
observing, as noted previously, that aver-
(5) R it = αi + βiR mt + ηit , age excess returns and cumulative average
is estimated for a period7 from month s – 24 excess returns should be zero in the ab-
to month s – 12. The coefficients from this sence of “news” that permanently alters the
regression, as well as the values of R mt dur- value of the firm. The extent to which these
ing the strike period, allow us to generate returns differ from zero is evidence in sup-
an estimate—R̂it—of what would have hap- port of the hypothesis that the events we
pened had the strike not occurred, where have identified provided important news.
Another issue is the definition and tim-
(6) R̂it = α̂i + β̂i Rmt , ing of the event. In the typical event study,
where excess returns over a period of a few
and where α̂i and β̂i are OLS estimates of
days are being evaluated, defining the tim-
the parameters in equation (5) and R̂ it is ing of the event is critically important and
merely the predicted return. Our reason often very difficult. Researchers must be
for estimating this regression using data for
able to carefully identify when participants
in capital markets first became aware of
news. We are not as concerned with this
issue, since our periods are measured in
7
We tried other prediction periods with no mean- months. Other implications of the timing
ingful effect on the results. are discussed below.
IMPACT OF STRIKES ON FINANCIAL MARKETS, 1925–1937 223
rians have agreed are pivotal in American we also attempted to identify the “winner”
history” (p. xii). In part due to limitations of each strike.11
of our financial market data, we examine To situate our sample in the universe of
only 36 strikes occurring over the time all strikes that occurred during this period,
period we consider. we present some information from Griffin
Importantly, this same source also pro- (1939), who included a much larger set of
vides us with a wealth of other valuable strikes in his analysis of strikes from 1880 to
information about each strike that allows 1937. Figure 1 (which was generated using
us to create another set of variables, includ- data from the Griffin study) reveals that for
ing the duration of each strike, the industry the period 1925–37 (the period we ana-
involved in the strike, whether the union lyze), the median annual percentage of
was recognized by the struck firm as a result strikes that were “successes” (from the per-
of the strike, whether the union was new or spective of the unions) was 35%; of “fail-
established,9 the number of strikers in- ures,” 33.4%; and of compromises, 30.7%.
volved, whether there was violence during Given the consistency with our estimates,
the strike, whether wages increased, de- we conclude that the strikes in our sample,
creased, or stayed the same after the strike, apart from their greater “importance,” are
and who was the eventual “winner” of the not radically different from the broader
strike (union or management). sample of strikes.
Simple statistics for each of the strikes Our stock price data come from Cowles’s
are contained in Table 1. Obviously, some Common-Stock Indexes: 1871–1937 (1938).
of the data in this table, such as the strike’s This book contains several series for com-
start date and the number of strikers in- mon stocks by industry by month over a
volved, are based on purely “objective” cri- relatively long time period. One distin-
teria and are therefore easily culled from guishing characteristic of the book is the
the strike narratives. Other data, such as tremendous amount of effort and meticu-
whether the union or firm “won,” are more lous attention to detail that went into its
subjective. We discuss these subjective description of the data and industries. In-
measures below. cluded are indexes on dividend payments,
The first strike in our sample started in price-earnings ratios, earnings, stock prices,
January 1925 and the last one started in and stock prices including cash dividends.
May 1937.10 The strikes occurred in 17 For each industry, we scanned in the stock
different industries. The average strike prices, including cash dividends, for each
duration was 5.5 months. Violence was month from 1906 to 1937 (although this
mentioned in the narratives in just over paper only examines strikes that occurred
half of the strikes. Wages decreased in only during the period 1925–37). Because of a
a handful of cases, stayed the same in about four-month gap in the information during
half, and increased in just over a third of World War I, we are left with 380 months of
strikes. Following Card and Olson (1995), data for each industry. Since we collected
information on 69 industries, this gives us
9
We define an “established” or “old” union by first
11
identifying the name of the union from accounts in We identified the union as the winner in 53% of
Filippelli (1990) and a variety of other sources (Gifford the strikes. Obviously it is not always easy to identify
1999; Reynolds and Killingsworth 1944; Fink 1977) to the “winner” of a strike. We determined the winner
identify the date the union was established. Unions based on our subjective evaluation of the Filippelli
older than three years were defined as established. narratives. In 10% of the cases, the winner of the
Our results are robust with respect to different defini- strike is not clear (see Table 1). Our results are
tions of “established.” insensitive to our treatment of the ambiguous cases.
10 Below, we further investigate the strikes that led to
Later strikes are covered in the Filippelli (1990)
volume, but our stock price data (described below) union recognition, often one of the key goals of the
end at the conclusion of 1937. strikers.
IMPACT OF STRIKES ON FINANCIAL MARKETS, 1925–1937 225
26,220 industry/months of data.12 It is also information on security prices for all indus-
worth noting that we do not have complete tries for the entire time period. One ex-
ample is absence of stock prices for auto-
12 mobiles and trucks, which, as of the late
The scanning technology, along with Optical
Character Recognition (OCR) software, worked re- 19th century, had not yet been invented.
markably well. We hand-checked each observation Figure 2 displays the average stock price
and found that only about 4% were in error. over time using these data. The dramatic
226 INDUSTRIAL AND LABOR RELATIONS REVIEW
increase up to the great crash of 1929 is kets at the start of the strike and a different
clear from the figure, as is the subsequent one at the end. 13 Two examples may help
increase. explain this. The number of strikers is
known at the start of the strike, so we expect
this variable to affect prices at the start of
Empirical Results
the strike. Since this information is already
In many traditional financial event stud- known at the strike’s beginning, no doubt
ies, it is transparent how one dates an it is already incorporated into stock prices
“event.” The same is not true for all strikes by the end, and therefore has less of an
in our sample. In principle, the appropri- effect at that juncture. On the other hand,
ate date is the date at which most of the we have also recorded information on
“information” in the strike is incorporated. whether wages went up, went down, or
If the financial markets are forward-look- stayed the same. However, this is clearly
ing, and most of the information is re- only known for sure at the end of the strike
vealed at the beginning of the strike, then (although markets may have an educated
the date of the strike announcement is guess at the strike’s onset as to what will
most relevant. Table 2 presents our esti- happen to wages by strike’s end) and, there-
mates of cumulative average excess indus- fore, we expect a larger share price reac-
try stock returns for various windows rela- tion to wage changes at the end of the
tive to the strike announcement date. In strike. We will discuss share price changes
Table 3, we concentrate on estimates of the around the start of the strike (Table 2),
cumulative average excess industry stock
returns relative to the strike ending date.
We suspect that certain types of news 13
We are grateful to an anonymous referee for this
provoke one reaction from financial mar- suggestion.
IMPACT OF STRIKES ON FINANCIAL MARKETS, 1925–1937 227
More arresting, perhaps, is that when fraction of our total observations), our point
wages fell in response to the strike, the estimates indicate that the value of the
estimated positive impact on the value of industry fell between 3% and 5%, although
the industry was roughly 9% using our pre- our estimates for the cases of “wages up”
ferred window width, and statistically dif- are imprecise. The same issue of timing
ferent from zero. In contrast, when wages holds here as well. We discuss the reaction
remained the same or increased (a tiny at the end of the strike below.
IMPACT OF STRIKES ON FINANCIAL MARKETS, 1925–1937 229
It is also interesting to note that strikes reasonable to expect that some of the infor-
leading to the recognition of the union by mation about the strike, such as who “won”
the firm appear to have had a much larger and whether wages increased, would not be
negative share price reaction than strikes fully revealed until the end of the strike.
that did not lead to the recognition of a It turns out that the wage changes are
union. (Compare, for example, –0.065 to – perfectly in line with this idea.15 From the
0.016, in the month –1 to month +1 window “wages up,” “wages down,” and “wages same”
in Table 2.) Also, as expected, strikes that section of Table 3, it is clear that this infor-
involved an entire industry had a much mation had a larger effect around the strike
larger negative effect (albeit an imprecisely ending date (where it was more likely to be
estimated one) on industry stock prices fully revealed). In fact, the share price
than strikes involving a single firm (or a reaction to “wages down” was approximately
small number of firms). +13%. The other piece of information that
Strikes that involved new versus estab- we expected to have a larger impact at the
lished unions are the subject of the last two end of the strike than at the beginning is
rows of Table 2. It appears that, on average, who “won” the strike. For some reason, our
strikes by established unions led to larger empirical findings do not support this idea.
negative industry share price reactions. In addition, it is interesting to note what
Although these estimates are not precise, happened to overall stock prices around
they are consistent with the view that more strike start times and strike end times. The
established unions have more power against initial news of a strike tended to send stock
management than do new unions. prices down (row 1 of Table 2), as clearly
The only apparently anomalous results this was a signal of some disruption of busi-
for the start of the strike are those for the ness. On the other hand, the overall stock
number of strikers: our point estimates for price reaction to strike ends was positive
the effect on stock prices are larger in (row 1 of Table 3), which suggests that
magnitude for small strikes (–5.6%) than investors were happy that the strike was
for large strikes (–0.8%). This is less anoma- over and that firms could get back to busi-
lous than meets the eye, however, since it is ness.
explicable by our mechanism for choosing In Table 4, we combine both windows—
strikes. If size is only one aspect of “impor- around the start of the strike and around
tance,” then strikes with fewer strikers that the end of the strike. This is an appropriate
made it to the list had to be more important summary if both the strike announcement
in other dimensions. The results for other and its conclusion contain significant eco-
window widths are generally insignificantly nomic news. Our estimates become some-
different from the results for our preferred what more precise and the magnitude of
window widths, and are generally less pre- the effects becomes much larger. For our
cise. preferred window widths, union wins lead
Table 3 repeats the analysis summarized to a decrease of roughly 3% in the value of
in Table 2, except that windows are calcu- the firm. For wage changes, our point
lated around the end date of the strike. In estimates are quite large. Strikes that re-
general, the results are uniformly less pre- sulted in lower wages led to increases of
cise and insignificantly different from zero 22% in the value of the firm, and strikes
at conventional levels of significance. One with no wage increases led to losses on the
possible reason for this is that the end of order of 7%. Likewise, short strikes led to
the strike may be difficult to identify cor- an increase of roughly 7%, and our longer
rectly, especially in those cases where man-
agement is defined as the winner. This is
consistent with the view that most of the
“news” in strikes occurs at the beginning of
the strike, and also agrees with other re- 15
Again, we thank an anonymous referee for this
search. However, as we noted above, it is suggestion.
230 INDUSTRIAL AND LABOR RELATIONS REVIEW
strikes led to losses of about 8%. In addi- lished unions had much larger negative
tion, using our preferred window width share price reactions than strikes involv-
(month –1 to month +1), recognition strikes ing new unions.
appear to have led to losses of about 10% As we discuss above, several papers (for
(non-recognition strikes led to small gains), example, Becker and Olson 1986; Neumann
industry-wide strikes resulted in losses 1980; Persons 1995; and Nelson et al. 1994)
on the order of 18%, and strikes by estab- have found a negative share price reaction
IMPACT OF STRIKES ON FINANCIAL MARKETS, 1925–1937 231
to strikes on the order of 1–4%. Our between our study and the aforementioned
baseline reaction to stock prices (in row 1 studies.
of Table 2) is a loss of 3% of stock price for First, our study concentrates on monthly
the three-month event-window (month –1 returns; the others concentrate on daily
through month +1, our preferred specifica- returns. We argue that the decision to
tion). Despite this similarity, we should study monthly returns is more reasonable
again point out some important differences for our time period. This assumption would
232 INDUSTRIAL AND LABOR RELATIONS REVIEW
most obviously present problems for more time when changes in the level of unioniza-
recent time periods; no doubt, markets tion were more important. One advantage
react more quickly today than in the past. 16 of this focus is that it is easier to measure
Second, our focus is on industries and previ- the effect of “large changes” than it is to
ous research has focused on share price detect small changes in the current era of
reactions in individual firms. Finally, we use declining unionization. The time between
data from a period in which labor histori- the World Wars was particularly important
ans believe strikes were “pivotal in Ameri- in the history of unionization. Unlike most
can history.” In any event, our results sug- recent strikes, during that earlier period
gest a relatively large share price reaction many strikes were an attempt by workers to
to strikes for entire industries, and these change the “terms of trade” between work-
effects are larger than those found in the ers and employers.
aforementioned studies except for Becker Our empirical approach melds two pre-
and Olson (1986), although, like the oth- vious literatures: in one, the effects of
ers, their focus was on the reactions of strikes on industry-wide measures of out-
individual firms. put, such as inventories, are studied, and
Given our concentration on industry re- in the second, a standard “event study”
turns, the magnitude of our estimates might approach is used to examine the rela-
be surprising, since we expect industry- tionship between strikes and individual
wide reactions to strikes to be smaller than firm stock valuations. We develop a data
the effect on specific firms (as business set with an unusually rich set of charac-
moves from struck to nonstruck firms, for teristics for each of the strikes for the
example). Moreover, our evidence is time period 1925–37 and combine this
roughly consistent with that reported by information with stock return data. We
Kramer and Vasconcellos (1996), who use a very parsimonious model that helps
found effects on nonstruck firms that were provide one consistent interpretation of
statistically indistinguishable from those on our results.
struck firms from 1982 to 1990. On the On a descriptive level, we find that strikes
other hand, given our focus on the seminal had large negative effects on industry stock
industrial relations strikes of the interwar valuation. In addition, longer strikes, vio-
period, our results are consistent with the lent strikes, strikes won by the union, strikes
views of historians and others who have leading to union recognition, industry-wide
singled out this period as one of unusual strikes, and strikes that led to wage in-
importance in the development of postwar creases affected industry stock prices more
industrial relations. negatively than strikes with other charac-
teristics. We also examine industry stock
price movements around the start and the
Concluding Comments
end of the strike. It seems that “news”
The primary aim of this work has been to about the strike was revealed early and, in
investigate the effect of strikes on industry fact, there is some evidence that investors
stock prices at a time when unions were were able to predict strike outcomes. How-
rapidly evolving. In contrast to recent work ever, we do find larger reactions to some
on the subject that has used data from the news that could only be completely revealed
recent past, we have examined a period of at the end of the strike (for example, worker
wage changes).
The generally asymmetric response of
16
Farber and Hallock (2000) discussed the stock prices to wins and losses is consistent
changing stock price reaction to job loss announce- with our expectations. Our analysis sug-
ments over time using data from 1970–97 and
briefly discussed whether changes in technology
gests that financial markets viewed union
have somehow made news less timely and therefore victories in the interwar period as very im-
less “newsworthy.” They found very little support portant determinants of the share of firm
for this hypothesis. profits going to stockholders.
IMPACT OF STRIKES ON FINANCIAL MARKETS, 1925–1937 233
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