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1528-2635

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The Effect of Labor Union Strength on Future Stock Price Crash Risk: Evidence from Korean Stock Market

Heejeong Shin

This study investigates the effect of labor union strength on future stock price crash risk. Based on the notion that a strike by labor union signals the strength of unionization in firms, I examine the relationship between labor unions and future stock price crash risk, and more importantly, whether labor union strength subrogated by the activity (i.e., a strike) moderates the likelihood of future stock price crash within unionized firms. The results show that while labor unionization itself has a positive impact on future stock price crash risk, on which labor strength has a negative impact within unionized firms. It implies that a strike as a proxy for the labor union strength may mitigate the increased stock price crash risk in unionized firms in Korean stock market. To the extent that stock price crash occurs due to managerial opportunism to withhold the firm’s information, this finding suggests that rather than a presence of labor unions in firms, their strength revealed by the activity such as a strike may reduce the managerial opportunism, which leads to lower future stock price crash risk. This study adds to the literature on the role of labor unions as nonfinancial stakeholders in accounting environment and also on the determinants of stock price crash.