Skip to main content
SpringerLink
Log in

The effect of labor unions on innovation and market valuation in business group affiliations: new evidence from South Korea

  • Original Article
  • Published:
Asian Business & Management Aims and scope Submit manuscript

Abstract

This paper examines how non-financial stakeholders, especially labor unions, affect firms’ innovation in business group affiliations. Using firm-level labor union data unique to Korea, we find that firms’ innovation activities are negatively related to unionization. This negative relationship is more pronounced for large business groups, suggesting that Korean chaebols are more concerned with the influence of powerful stakeholders—union workers. Also, equity market valuation of R&D reduction under union pressure is not negative for chaebol-affiliated firms, whereas it is negative for non-affiliated firms. These results indicate that the equity market perceives that chaebols’ internal capital market facilitates group-oriented R&D investment decisions.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. According to IMD World Competitiveness Rankings (2018), Korea ranked 63rd among 63 countries in labor market efficiency. Also, the union membership ratio is above 10%, which is higher than the average in OECD countries.

  2. Labor unions in Korea are affiliated with either the Minju Korean Confederation of Trade Unions or the Hanguk Federation of Korean Trade Unions, or are unaffiliated.

  3. Expenditure on research (or on the research phase of an internal project) shall be recognized as an expense when it is incurred, whereas an intangible assets arising from development (or from the development phase of an internal project) shall be recognized if, and only if, an entity can demonstrate all of the following: (a) the technical feasibility of completing the intangible asset so that it will be available for use or sale, (b) its intention to complete the intangible asset and use or sell it, (c) its ability to use or sell the intangible asset, (d) how the intangible asset will generate probable future economic benefits, (e) the availability of adequate technical, financial, and other resources to complete the development and to use or sell the intangible asset, (f) its ability to measure reliably the expenditure attributable to the intangible asset during its development. (IAS 38).

  4. See Fair Trade Act Decree 17 Article 9, amended 2008.

  5. We acknowledge the limitations of using Female_Ratio as an instrument, because it is still an endogenous variable and such employment structure matters for market valuation. Despite such limitations, many previous studies have used this variable as an IV of unionization. Also, we confirm that Female_Ratio is not significantly related to R&D expenditures while it is significantly related to UNION in full OLS specification.

  6. The sample size for 2SLS analysis is smaller than the one used in previous tests, since Female_Ratio data are available only after 2001 and lagged variables are used as independent variables in our regression models.

References

  • Agrawal, A. K., & Matsa, D. A. (2013). Labor unemployment risk and corporate financing decisions. Journal of Financial Economics,108(2), 449–470.

    Article  Google Scholar 

  • Ahuja, G., Lampert, C. M., & Tandon, V. (2008). Moving beyond Schumpeter: Management research on the determinants of technological innovation. Academy of Management Annals,2, 1–98.

    Article  Google Scholar 

  • Bae, G. S., Cheon, Y. S., & Kang, J. K. (2008). Intragroup propping: Evidence from the stock-price effects of earnings announcements by Korean business groups. The Review of Financial Studies,21(5), 2015–2060.

    Article  Google Scholar 

  • Baldwin, C. Y. (1983). Productivity and labor unions: An application of the theory of self-enforcing contracts. Journal of Business, 56, 155–185.

    Article  Google Scholar 

  • Banning, K., & Chiles, T. (2007). Trade-offs in the labor union-CEO compensation relationship. Journal of Labor Research,28(2), 347–357.

    Article  Google Scholar 

  • Belloc, F. (2012). Corporate governance and innovation: A survey. Journal of Economic Surveys,26(5), 835–864.

    Article  Google Scholar 

  • Betts, J. R., Odgers, C. W., & Wilson, M. K. (2001). The effects of unions on research and development: An empirical analysis using multi-year data. Canadian Journal of Economics,34(3), 785–806.

    Article  Google Scholar 

  • Blanchflower, D. G., Oswald, A. J., & Sanfey, P. (1996). Wages, profits, and rent-sharing. The Quarterly Journal of Economics,111(1), 227–251.

    Article  Google Scholar 

  • Burns, T., & Stalker, G. M. (1961). The management of innovation. London, U.K.: Tavistock Publications.

    Google Scholar 

  • Bushee, B. (1998). The influence of institutional investors on myopic R&D investment behavior. The Accounting Review,73, 305–333.

    Google Scholar 

  • Byun, H. Y., Choi, S., Hwang, L. S., & Kim, R. G. (2013). Business group affiliation, ownership structure, and the cost of debt. Journal of Corporate Finance,23, 311–331.

    Article  Google Scholar 

  • Chang, S. J. (2003). Ownership structure, expropriation, and performance of group-affiliated companies in Korea. Academy of Management Journal,46(2), 238–253.

    Google Scholar 

  • Chang, S. J., & Hong, J. (2000). Economic performance of group-affiliated companies in Korea: Intragroup resource sharing and internal business transactions. Academy of Management Journal,43(3), 429–448.

    Google Scholar 

  • Chauvin, K. W., & Hirschey, M. (1993). Advertising, R&D expenditures and the market value of the firm. Financial Management, 128–140.

  • Chemmanur, T. J., Cheng, Y., & Zhang, T. (2013). Human capital, capital structure, and employee pay: An empirical analysis. Journal of Financial Economics,110(2), 478–502.

    Article  Google Scholar 

  • Chen, H. J., Kacperczyk, M., & Ortiz-Molina, H. (2011). Labor unions, operating flexibility, and the cost of equity. Journal of Financial and Quantitative Analysis,46(01), 25–58.

    Article  Google Scholar 

  • Chen, H., Kacperczyk, M., & Ortiz-Molina, H. (2012). Do nonfinancial stakeholders affect agency costs of debt? Evidence from unionized workers. Review of Finance,16(2), 347–383.

    Article  Google Scholar 

  • Choi, C. S. (2013). Capital structure as a strategic role in collective bargaining with labor unions. Master’s dissertation in Dong-A University (Printed in Korean).

  • Choi, J. J., Jo, H., Kim, J., & Kim, M. S. (2018). Business groups and corporate social responsibility. Journal of Business Ethics,153(4), 931–954.

    Article  Google Scholar 

  • Choi, S., Sohn, P., & Seo, J. Y. (2016). Relationship between leverage and the bargaining power of labor unions: Evidence from theoretical and empirical perspectives. Estudios de Economía, 43(1).

  • Claessens, S., Djankov, S., & Lang, L. H. (2000). The separation of ownership and control in East Asian corporations. Journal of Financial Economics,58(1–2), 81–112.

    Article  Google Scholar 

  • Cohen, W. M., & Levinthal, D. A. (1990). Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly,35, 128–152.

    Article  Google Scholar 

  • Connolly, R. A., Hirsch, B. T., & Hirschey, M. (1986). Union rent seeking, intangible capital, and market value of the firm. The Review of Economics and Statistics, 567–577.

  • Drago, R., & Wooden, M. (1994). Unions, innovation and investment: Australian evidence. Applied Economics,26(6), 609–615.

    Article  Google Scholar 

  • Faleye, O., Mehrotra, V., & Morck, R. (2006). When labor has a voice in corporate governance. Journal of Financial and Quantitative Analysis,41(3), 489–510.

    Article  Google Scholar 

  • Fan, J. P., & Wong, T. J. (2002). Corporate ownership structure and the informativeness of accounting earnings in East Asia. Journal of Accounting and Economics,33(3), 401–425.

    Article  Google Scholar 

  • Fang, V. W., Tian, X., & Tice, S. (2014). Does stock liquidity enhance or impede firm innovation? The Journal of Finance,69(5), 2085–2125.

    Article  Google Scholar 

  • Farber, D. B., Hsieh, H-Y, Jung, B., & Yi, H. (2013). The impact of non-financial stakeholders on accounting conservatism: The case of labor unions. https://ssrn.com/abstract=2001940 or http://dx.doi.org/10.2139/ssrn.2001940.

  • FitzRoy, F. R., & Kraft, K. (1988). Innovation, rent-sharing and organized labor: WZB. Beschäftigung: Forschungsschwerpunkt Arbeitsmarkt u.

    Google Scholar 

  • Freeman, R., & Medoff, J. (1984). What do unions do?. New York: Basic Books.

    Google Scholar 

  • Grant, R. M. (1996). Toward a knowledge-based theory of the firm. Strategic Management Journal,17, 109–122.

    Article  Google Scholar 

  • Griliches, Z. (1981). Market value, R&D, and patents. Economics letters,7(2), 183–187.

    Article  Google Scholar 

  • Grout, P. A. (1984). Investment and wages in the absence of binding contracts: A Nash bargaining approach. Econometrica: Journal of the Econometric Society, 449–460.

  • Hall, B. H. (1993). The stock market’s valuation of R&D investment during the 1980’s. The American Economic Review,83(2), 259–264.

    Google Scholar 

  • Hamm, S. J., Jung, B., & Lee, W. J. (2018). Labor unions and income smoothing. Contemporary Accounting Research. https://doi.org/10.1111/1911-3846.12321.

    Article  Google Scholar 

  • He, J. J., & Tian, X. (2013). The dark side of analyst coverage: The case of innovation. Journal of Financial Economics,109(3), 856–878.

    Article  Google Scholar 

  • Hilary, G. (2006). Organized labor and information asymmetry in the financial markets. Review of Accounting Studies,11(4), 525–548.

    Article  Google Scholar 

  • Hirsch, B. T. (1980). The determinants of unionization: An analysis of interarea differences. Industrial and Labor Relations Review,33, 142–149.

    Article  Google Scholar 

  • Hirsch, B. T. (1992). Firm investment behavior and collective bargaining strategy. Industrial Relations: A Journal of Economy and Society,31(1), 95–121.

    Google Scholar 

  • Hirsch, B. T. (2004). What do unions do for economic performance? Journal of Labor Research, 25, 417–455.

    Google Scholar 

  • Hirsch, B. T., & Link, A. N. (1987). Labor union effects on innovative activity. Journal of Labor Research,8(4), 323–332.

    Article  Google Scholar 

  • Holmstrom, B. (1989). Agency costs and innovation. Journal of Economic Behavior & Organization,12(3), 305–327.

    Article  Google Scholar 

  • Hsieh, H. Y. S., Jung, B., & Yi, H. (2017). The impact of non-financial stakeholders on accounting conservatism: The case of labor unions. Seoul Journal of Business, 23(1).

  • Jeong, J. W., & Bae, G. S. (2007). Long-run stock price performance of the firms that grant stock options and the separation of ownership and management. Korean Financial Management Research,24(1), 149–182. (Printed in Korean).

    Google Scholar 

  • Joh, S. W. (2003). Corporate governance and firm profitability: Evidence from Korea before the economic crisis. Journal of Financial Economics,68, 287–322.

    Article  Google Scholar 

  • Kang, M. J., Lee, H. Y., Lee, M. G., & Park, J. C. (2014). The association between related-party transactions and control-ownership wedge: Evidence from Korea. Pacific-Basin Finance Journal,24(1), 272–296.

    Article  Google Scholar 

  • Katila, R., & Ahuja, G. (2002). Something old, something new: A longitudinal study of search behavior and new product introduction. Academy of Management Journal,45(6), 1183–1194.

    Google Scholar 

  • Khanna, T., & Yafeh, Y. (2005). Business groups and risk sharing around the world. The Journal of Business,78(1), 301–340.

    Article  Google Scholar 

  • Khanna, T., & Yafeh, Y. (2007). Business groups in emerging markets: Paragons or parasites? Journal of Economic literature,45(2), 331–372.

    Article  Google Scholar 

  • Kim, J. H. (2008). The changes over time in union wage premium in Korea: 1998-2007. Korean Journal of Labour Economics,31(3), 75–105. (Printed in Korean).

    Google Scholar 

  • Kim, J. B., & Yi, C. H. (2006). Ownership structure, business group affiliation, listing status, and earnings management: Evidence from Korea. Contemporary Accounting Research,23(2), 427–464.

    Article  Google Scholar 

  • Klasa, S., Maxwell, W. F., & Ortiz-Molina, H. (2009). The strategic use of corporate cash holdings in collective bargaining with labor unions. Journal of Financial Economics,92(3), 421–442.

    Article  Google Scholar 

  • Lee, M. G., Lee, S. H., & Kim, J. S. (2014). An empirical study on the effects of labor unions’ roles on firm values. Korean Corporation Management Review,21(4), 83–102. (Printed in Korean).

    Google Scholar 

  • Lee, D. S., & Mas, A. (2012). Long-run impacts of unions on firms: New evidence from financial markets, 1961–1999. The Quarterly Journal of Economics,127(1), 333–378.

    Article  Google Scholar 

  • Matsa, D. A. (2010). Capital structure as a strategic variable: Evidence from collective bargaining. The Journal of Finance,65(3), 1197–1232.

    Article  Google Scholar 

  • Menezes-Filho, N., Ulph, D., & Van Reenen, J. (1998a). R&D and unionism: Comparative evidence from British companies and establishments. ILR Review,52(1), 45–63.

    Article  Google Scholar 

  • Menezes-Filho, N., Ulph, D., & Van Reenen, J. (1998b). The determination of R&D: Empirical evidence on the role of unions. European Economic Review,42(3–5), 919–930.

    Article  Google Scholar 

  • Menezes-Filho, N., & Van Reenen, J. (2003). Unions and innovation: A survey of the theory and empirical evidence. Working paper

  • Michie, J., & Sheehan, M. (2003). Labour market deregulation, ‘flexibility’ and innovation. Cambridge Journal of Economics,27(1), 123–143.

    Article  Google Scholar 

  • Miller, D., & Le Breton-Miller, I. (2003). Challenge versus advantage in family business. Strategic Organization,1(1), 127–134.

    Article  Google Scholar 

  • Nahapiet, J., & Ghoshal, S. (1998). Social capital, intellectual capital, and the organizational advantage. Academy of Management Review,23, 242–266.

    Article  Google Scholar 

  • Ruback, R. S., & Zimmerman, M. B. (1984). Unionization and profitability: Evidence from the capital market. Journal of Political Economy,92(6), 1134–1157.

    Article  Google Scholar 

  • Schnabel, C., & Wagner, J. (1992). Unions and innovation: Evidence from German micro data. Economics letters,39(3), 369–373.

    Article  Google Scholar 

  • Schumpeter, J. A. (1934). The theory of economic development: An inquiry into profits, capital, credit, interest, and the business cycle (Vol. 55). London: Oxford University Press.

    Google Scholar 

  • Shin, S. Y., & Chun, H. M. (2016). Labor Union and Tax Avoidance: Evidence from Korea. Journal of Taxation and Accounting,17(2), 9–34. (Printed in Korean).

    Google Scholar 

  • Shipton, H., Fay, D., West, M., Patterson, M., & Birdi, K. (2005). Managing people to promote innovation. Creativity and Innovation Management,14(2), 118–128.

    Article  Google Scholar 

  • Son, P. D. (2013). Study on relationship between firms’ cash holdings and collective bargaining power of labor unions. Korea Accounting Information Review,31(4), 183–208.

    Google Scholar 

  • Ulph, A., & Ulph, D. (1989). Labor markets and innovation. Journal of the Japanese and International Economies,3(4), 403–423.

    Article  Google Scholar 

  • Watts, R. L., & Zimmerman, J. L. (1978). Towards a positive theory of the determination of accounting standards. Accounting Review, 112–134.

  • Yoon, B. J. (2005). Labor militancy in South Korea. Asian Economic Journal,19(2), 205–230.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. College of Business & Economics, Gachon University, 1342 Seongnamdaero, Sujeong-gu, Seongnam-si, Gyunggi-do, 13120, South Korea

    Ilhang Shin

  2. Ewha School of Business, Ewha Womans University, 52 Ewhayeodae-gil, Seodaemun-gu, Seoul, 03760, South Korea

    Sorah Park & Seungho Choi

  3. School of Business, Kyungpook National University, 80 Daehakro, Bukgu, Daegu, 41566, South Korea

    Seong Pyo Cho

Authors
  1. Ilhang Shin
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Sorah Park
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Seong Pyo Cho
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Seungho Choi
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Sorah Park.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Shin, I., Park, S., Cho, S.P. et al. The effect of labor unions on innovation and market valuation in business group affiliations: new evidence from South Korea. Asian Bus Manage 19, 239–270 (2020). https://doi.org/10.1057/s41291-019-00089-9

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/s41291-019-00089-9

Keywords

Search

Navigation