When unions "mattered": The impact of strikes on financial markets, 1925-1937.(Statistical Data Included)

JOHN DINARDO and KEVIN F. HALLOCK (*)

Given our focus on strikes, our paper is directly related to two literatures. In one (see Neumann and Reder 1984), the effect of strikes on industry-wide output is measured using industry-wide measures such as inventories and shipments. In another, the lost value associated with strikes is measured using data on market valuation (see, for example, Ruback and Zimmerman 1984). This literature is closely related to the "event study" literature in finance and has focused exclusively on using stock market returns from individual firms. At its most basic level, our approach is a combination of these two approaches. Like the firm-level studies, our study uses information from the capital markets; unlike that literature, but in common with the literature on the "industry-wide" effect of strikes, our study focuses on broadly defined industrial aggregates.

This examination of the Stock Market's responsiveness to strikes looks specifically at strike actions that labor historians generally view as the major ones occurring in the United States in the years 1925-37. The authors find that strikes had large, negative effects on industry stock value. Longer strikes, violent strikes, strikes in which unions "won," industry-wide strikes, strikes that led to union recognition, and strikes that led to large wage increases were associated with larger negative share price reactions than were other strikes. Much of the "news" generated by the typical strike seems to have been registered by the Stock Market very early in the strike. However, there were also some fairly large stock price reactions to news that could be fully revealed only at the end of a strike.

This paper is an examination of the impact of important strikes on industry stock returns at a time when unions were rapidly evolving. We focus on the economic consequences of strikes during the interwar period as reflected in the behavior of the stock market. Our point of departure is the identification of strikes that, in contrast with most present-day strikes, were primarily an attempt by workers to change the "terms of trade" between workers and their employers. Using standard event-study methods, we evaluate the effect of various important strike characteristics on broad industry-level measures of equity prices. While several studies (for example, Becker and Olson 1986; Neumann 1980; Kramer and Vasconcellos 1996; Persons 1995) have investigated the link between strikes and stock prices, they have focused on a much more recent period--one for which data are publicly available--and the strikes they have examined arguably had a much smaller impact on the structure of industrial relations than did the strike s in our sample.

Our study, therefore, begins with the premise that the extent of union effects is potentially easier to detect when changes in unionization are large and important than when they are modest. Toward that end, we focus on the period between the two World Wars, an important time for the U.S. labor movement. After witnessing a prodigious and rapid increase in membership at the end of the nineteenth century, American unionism experienced a decline of almost equal magnitude in the period leading up to the first World War. The ferocity of business and government hostility to the attempt to organize American workers left little doubt about the importance of the struggle. As we will argue below, this period and the period leading up to World War II provide a unique time to investigate the impact of strikes on firms.

Analytical Framework

At first glance, it might be surprising to find any effect of strike activity on industry-wide stock prices. The first puzzle involves why strikes should have any effect on the returns of individual firms. In the context of an infinitely long-lived firm, and when strikes have no effect on the terms of trade, the change in the value of discounted earnings streams would be quite small. Given the considerable evidence that the measured change in market values of firms resulting from strikes is not negligible (for example, Becker and Olson 1986; Neumann 1980; Ruback and Zimmerman 1984), however, we follow the earlier literature and assume that it is meaningful to investigate the presence of such an effect.