Right-to-Work Laws: New Evidence from the Stock Market.

Steven E. Abraham [*]

Paula B. Voost [+]

This article is an empirical examination of whether or not stockholder wealth rises in response to passage of a right-to-work law--a state law banning union security clauses from collective bargaining agreements. Stockholder wealth rose when Louisiana passed such a law in 1976 and when Idaho did so in 1985-1986. Presumably this occurred because investors anticipated higher future profits with weaker labor unions or a lower probability of future organization. This is new evidence that such laws are more than symbolic: They hamper labor unions.

1. Introduction

Business organizations, the National Right-to-Work Committee, and organized labor periodically devote enormous resources to battles over passage or repeal of individual state right-to-work (RTW) laws. All RTW laws outlaw union shop agreements--clauses in collective bargaining agreements that require employees to join the union that represents them--and about half also outlaw agency shop agreements--clauses in collective bargaining agreements that require nonmembers to pay a fee to the union to cover the cost of representation. Supporters of RTW argue that employees should not be required to pay dues to a labor organization that they do not support. Opponents argue that because union contracts and grievance arbitration systems cover all employees, members and nonmembers, RTW laws encourage "free-riding" by individuals who want to gain the benefits of unionization without bearing the costs, and that this weakens labor unions.

Are RTW laws largely symbolic? Or do they reduce union membership, the probability of union growth, and union bargaining power? Informed opinion is still sharply divided. One view is that RTW laws reduce the probability of union organizing (at least in the years immediately following their passage) and that this, along with lower levels of membership in previously organized units, reduces the level of unionization in a state (e.g., Hirsch 1980; Carroll 1983; Garofalo and Malhotra 1992; Davis and Huston 1993, 1995). Ellwood and Fine (1987) present evidence that the effect on new organizing is most severe--with new organizing diminished between 32 and 38% in the 10 years after passage of a RTW law. [1] Zax and Ichniowski (1991; see also Ichniowski and Zax 1991) demonstrate that the dampening of new organizing extends to the public sector when it operates under RTW laws, even when those laws are favorable to unions in other respects.

Others, however, argue that RTW legislation is largely symbolic: It reflects the prevailing anti-union opinion climate of a particular state, but has little independent impact on union organizing or membership (Moore and Newman 1985, 1975; Wessels 1981; Lumsden and Peterson 1975; Sobel 1995 presents evidence on the true number of free-riders consistent with the taste hypothesis). RTW legislation is passed, in this perspective, in states in which public opinion is anti-union and the labor movement is politically weak. In these states, workers are less attracted to unions, and it is this public opinion climate, rather than the law itself, that hurts union growth. [2]

We present a new type of evidence on this issue from two states in which public opinion had turned sharply against unions (or at least in favor of RTW) in the period before the passage of a RTW law. We reason that, if passage of the RTW law itself actually lowers the probability of unionization or reduces the bargaining power of unions operating within a particular state, beyond the effect of the prior shift in attitudes, then anticipated future profits of firms operating in that state will rise in response to passage of that law (because unions are associated with lower firm profits). [3] Hence, equity values of those firms will increase. We use event study methodology to discover whether or not this actually happened in Louisiana when it passed a RTW law in 1976 and in Idaho when it passed a RTW law in l985-1986. [4]

Louisiana and Idaho are both well-suited to research based on the event study technique. Legislative action in both states took place in the period in which daily stock price data are available from all three sources of stock price data: New York, American, and NASDAQ. 5 Daily (as opposed to monthly) stock price data are much more likely to reveal statistically significant changes in shareholder equity (Brown and Warner 1985). Because we use daily rather than monthly data, a finding of no statistically significant change in shareholder equity would be valid evidence that RTW laws are symbolic rather than substantive.

Moreover, Louisiana and Idaho are good for our purposes in that they are both reasonably small. The only firms likely to be affected greatly by a law passed in Louisiana or Idaho would be firms that derive a significant portion of their business from operations in those states. Most of our work is based on the standard event study methodology used in other studies regarding the impact of legislation on shareholder returns; identification of a sample of firms affected by legislation to a greater degree than average is a requirement of this research strategy. (As detailed in the methodology section, event studies control for the general level of the market and the historical relation of shareholder returns for a particular stock to the general level of the market.) Finally, however, as a further check, we contrast results for the Louisiana and Idaho firms in our data set with results for two "control groups," each consisting of firms located primarily outside a respective state, but matched by industry to the state sample. [6]

2. Louisiana

A considerable amount of background information is available on the events leading up to the passage of Louisiana's RTW law in 1976 (Canak and Miller 1990). Attempts to organize oil-related industry in Louisiana in the late 1960s stimulated the formation of several oil- and construction-based anti-union state business organizations in the early 1970s. [7] The various groups became more unified, gained increasing support from major multinational corporations doing business in Louisiana over the next few years, and increased their influence over state legislative races. In 1975, the business lobby began generating support for RTW legislation, and then mounted a major media and lobbying blitz. Public opinion was swayed against unions when violence erupted in January 1976 in a jurisdictional dispute related to the construction of a chemical plant. Later in 1976, a more conservative legislature was elected, again with support from these same business organizations.

Nonetheless, organized labor in Louisiana, especially as represented by the state AFL-CIO, felt it could rely on lobbying and efforts in the legislative arena to block RTW. The AFL-CIO believed that it would be successful in keeping RTW legislation tied up in hostile committees, avoiding a full legislative vote. When these lobbying efforts failed, however, it was too late for labor to mount a campaign to influence public opinion (Canak and Miller 1990). The chronicle of the struggle over Louisiana's RTW law indicates that the probability of the passage of RTW legislation rose and fell with daily events in Louisiana's legislature--presumably affecting investors' evaluations.

3. Idaho

Idaho also has a long history with RTW. In the 1970s and 1980s alone, there were six different RTW bills introduced into the Idaho legislature, including the bill that was passed in 1985. [8] In the early and mid-1980s, RTW was generally supported by Idaho Republicans, and opposed by Idaho Democrats, including Governor John Evans. In the November 1984 elections, Republicans won a "veto-proof" majority in both houses of the state legislature, and Idaho newspapers specifically mentioned that RTW legislation was likely to be passed in the coming legislative session. In January 1985, RTW was indeed passed, vetoed, and then passed over that veto. This triggered an effort by the state AFL-CIO to subject the new law to a referendum, a referendum that was eventually held in November 1986 but won by RTW supporters. Events in Idaho, thus, took place over a longer time span than events in Louisiana. Legislative history was relatively less important and public contest of pro- and anti-RTW views was relatively more impor tant. In some respects, Idaho thus provides a less "clean" test of the impact of RTW legislation (because crucial event dates are less easy to determine) than Louisiana. Still, evidence from both states is worthy of consideration insofar as these are the only two states to pass RTW legislation in recent years. We use techniques that consider both specific "event dates" and the entire span of time in which RTW legislation was "pending" in either state.

4. Event Studies of Unions, Profitability, and Shareholder Wealth (Returns)

In developing our view that passage of a RTW law would elevate shareholder wealth in Louisiana and Idaho if RTW laws substantively hurt unions, we relied on a growing number of studies demonstrating that unionization and events associated with unionization reduce profits and shareholder wealth. By reducing the probability of unionization, and disadvantaging unions in other respects, a RTW law would increase shareholder wealth.

In the labor relations context, event studies estimate the change in security returns that occurs when unexpected information about a particular labor relations event is revealed to the investing public. Changes in security returns are treated as an unbiased estimate of the change in the discounted future profits of a firm (referred to as shareholder wealth) in response to the event. Event studies have been used frequently to evaluate the impact of unionism and events associated with unionism on firm profitability. In general, profits and shareholder wealth are negatively affected by unionization, other things equal.

Ruback and Zimmerman (1984) published the first study in this line of research, reporting that union victories in representation elections, and indeed even the occurrence of the elections themselves, reduce shareholder wealth. If RTW laws reduce either the probability of representation elections or the probability of union victory, the implication would be that such laws would increase shareholder wealth. Bronars and Deere (1990) confirm Ruback and Zimmerman's findings, and also report that shareholder equity losses are more substantial in situations where union wage gains might be expected to be large or where firms are more labor intensive. Interestingly, they find similar losses between firms located in RTW and non-RTW states at the time of union victory. Huth and MacDonald (1990) find that decertification elections in which employees choose to abandon their union representation increase shareholder wealth. Moreover, an event associated with unionism, strikes, has been found to reduce shareholder wealth ( Becker and Olson 1986; Neumann 1980). [9]

The event study approach also has been used to assess the impact of a wide variety of legislation on firm profitability (Abraham 1996; Chandy et al. 1995; Conner 1989; Hackl and Testani 1988; Romano 1987). The most relevant studies consider the impact of labor relations legislation. Using the same methodology that will be used in this paper, Olson and Becker (1990) found that the Wagner Act (National Labor Relations Act [NLRA] 1935) lowered shareholder wealth substantially relative to what would have been expected had the NLRA not been passed in a sample of 75 firms likely to have been affected by that statute. Olson and Becker's results are logical insofar as the Wagner Act increased union rights and encouraged labor organization. The Taft-Hartley Act of 1947 limited the Wagner Act by making certain union practices "unfair," by legalizing RTW statutes, by permitting decertification elections, and by other amendments to the NLRA generally favoring management. As might be expected, Abraham (1996) found that t he effect of Taft-Hartley on shareholder returns was positive, albeit not as large in magnitude as the negative impact that Olson and Becker report for the Wagner Act. A further result of Abraham's is even more relevant to this paper. He found that firms with substantial operations in states with RTW laws benefited more from the Taft-Hartley Act than firms that were located primarily in non-RTW states. [10]

Before this study, however, no one has utilized event study methodology to evaluate the impact of the passage of a RTW law in an individual state on shareholder wealth, presumably via its impact on unions and unionization in that same state. [11]

5. The Event Study Model

The effect of a RTW Act on security returns on any particular day is estimated by examining the equation:

[AR.sub.id] = [R.sub.id] - E([R.sub.id]\no RTW Act information) (1)

where [AR.sub.id] is the abnormal return to firm i on day d due to the passage of the a RTW law, [R.sub.id] is the actual return to firm i on day d and E([R.sub.id]\no RTW Act information) is the expected return to firm i on day d absent any information about the passage of a RTW Act. [R.sub.id] is readily available. [12] E([R.sub.id]\no RTW Act information) must be predicted by the researcher. That return is predicted by the market model, which posits that the return to any security on day d is a function of the market as a whole and the risk of investing in that security relative to the risk of investing in the market as a whole. The ex ante return to security i in any time period t equals:

[R.sub.it] = [[alpha].sub.i] + [[beta].sub.i]([R.sub.mt]) + [[epsilon].sub.it] (2)

where [R.sub.it] is the return to security i in time t, [R.sub.mt] is the Center for Research on Security Prices (CRSP) value-weighted index of all securities in time t and [[alpha].sub.i] and [[beta].sub.i] are parameters. The parameters in Equation 2 for each firm were estimated for each sample of firms using data from day -- 150 through day -51, treating the first event date (the day a RTW bill was introduced) as day 0. Data from a period clearly outside the event period were used to estimate Equation 2 so as to minimize the possibility of the firms' parameters having been affected by the event in question. One-hundred-day model estimation periods from day -150 through -51 are typically used in event study research (Peterson 1989).

According to the market model, [[epsilon].sub.it] is a fair game variable with mean = 0 and variation ([[sigma].sup.2]). Therefore, Equation 1 (the AR to firm i on event day d due to the RTW Act) is estimated by examining:

[AR.sub.id] = [R.sub.id] - ([[alpha].sub.i] + [[beta].sub.i][[R.sub.md]]) (3)

where [R.sub.md] is the CRSP value-weighted index of all securities on day d.

To determine the average effect of the event on day d for the sample of the firms, the researcher merely averages the ARs over all the firms in the sample:

[AR.sub.d] = 1/n[[[sigma].sup.n].sub.i=1][AR.sub.[id.sup.*]] (4)

The AR computed in Equation 4 discloses only the effect of the event on all the firms on one event day. If more than one event day is relevant (because the researcher hypothesizes that shareholders capitalized the effects of the event being investigated on more than one day), the average ARs computed for each day are summed over all the event days to estimate the average total effect of the event under investigation. This total effect is known as the cumulative abnormal return (CAR):

CAR = [[[sigma].sup.[d.sub.e]].sub.d=[d.sub.b]][AR.sub.d] (5)

where [d.sub.b] and [d.sub.e] are the beginning and ending days of the event period under investigation.

Whether or not the event being investigated did affect shareholder wealth in the sample of firms is determined by testing whether the CAR computed in Equation 5 is statistically different from zero. To make this determination, the CAR must be standardized to account for the possibility of statistical error in the determination of AR. Peterson (1989, p. 43) discusses several ways to compute [sigma](CAR) and obtain an appropriate test statistic, consisting of the ratio of CAR to [sigma](CAR), the standard error of the CAR. Such a statistic is used to determine the probability that the relation between the event being investigated and movement of shareholder returns arose by chance alone.

Because RTW laws affect all firms in a given state simultaneously, it is important in constructing the test statistic to control for the fact that the CARs may be due either to the event under investigation or to something else that caused the firms' actual returns to be different from those predicted by the market model on the particular event days in question (Binder 1985). Several procedures for dealing with this problem have been used, each of which uses the variance--covariance matrix of the residuals from the model estimation periods to correct for the "usual" correlation in the returns across firms. Any correlation in the sample estimated in the model estimation periods is clearly not due to the event in question. In this paper, the Burgstahler and Noreen (1986) "H-statistic" is used. The H-statistic includes the n X n variance--covariance matrix, [C.sub.ij], of the residuals formed from the regressions in Equation 2 used to estimate the parameters [alpha] and [beta] for each of the firms in the sampl e. Each off-diagonal element of the matrix, [C.sub.ij], represents the covariance between the estimated residuals from the market model for each of two firms. The diagonal elements of the matrix (where i = j) are the variances of the estimated residuals from the market model for each firm. In the Burgstahler and Noreen procedure, the denominator of the test statistic, [sigma](CAR), is constructed using this variance--covariance matrix as follows:

[sigma](CAR) = [[(n / n - 2) [[[sigma].sup.n].sub.i=1] [[[sigma].sup.n].sub.j=1] [C.sub.ij]].sup.1/2] (6)

The H-statistic used to test the statistical significance of the CAR is hence computed as

H = CAR/[sigma](CAR) (7)

This H-statistic has essentially the same interpretation as a t-statistic. [13] Including the corrected covariance in the statistical test of the CAR increases the likelihood that if the CAR is significant, it is due to the legislation being investigated. [14]

Finally, the proportion of positive to negative CARs in the sample was tested by using a generalized sign test statistic defined by Cowan (1992):

w - np/[[np(1 - p)].sup.1/2] (8)

where w is the number of firms in the sample with positive CARs, n is the number of firms in the sample, and p is the proportion of positive residuals in the model estimation period. This statistic has a standard normal distribution under the null hypothesis that the proportion of positive to negative returns in the event period is the same as the proportion of positive to negative returns in the model estimation period.

6. Sample of Firms

To test the impact of RTW legislation in Louisiana (Idaho), we needed to identify samples of firms that had substantial operations in Louisiana (Idaho) and traded stock on either the New York Stock Exchange, American Stock Exchange, or NASDAQ when the Act was passed. To form our samples, we used Compustat to identify public firms whose primary location was Louisiana (Idaho); [15] the procedure used by Compustat in identifying state location apparently relies heavily on corporate headquarters' location. Idaho and Louisiana are both small states, in which it is rare for a corporation to locate its headquarters unless it has substantial operations in the state, so this is not problematic. There were 23 companies in Louisiana and 12 in Idaho for which it was possible to obtain information on security returns.

We also formed matched samples of companies that were in the same industries as our Louisiana and Idaho samples, but identified as having a primary location outside of the respective state. We used American Business Information to identify the industry of each firm in our primary sample and its approximate size (in number of employees). We then selected another firm in the same industry (and where possible, of approximately the same size) that was listed as having a headquarters in a different state from either Louisiana or Idaho; a key requirement was for stock price information to be available for the control samples of matched firms. It became apparent in the course of the matching process that it would not always be possible to match firms both by industry and size; in these instances, the match was by industry alone. As a result, the matched samples should be thought of as controlling primarily for the distribution of industry in the particular states.

7. Critical Events in Louisiana Related to the Passage of RTW Legislation

The days on which investors adjusted their estimates of the value of their claims to future profits that would occur as a result of the event being tested are referred to as event days (dates). When testing the effects of legislation, one must identify every date on which investors concluded that the value of their claims to firm profits would change as a result of the legislation and the probability of its passage. Selecting the correct event dates is of foremost importance. Omitting days on which investors adjusted their expectations of the value of their claims to firm profits will produce an estimate of the impact of that legislation that is biased toward zero. Including in the analysis dates on which investors did not make such adjustments will introduce additional variability in the estimated impact of the legislation without adding any additional information about the effects of the law.

To determine when information about RTW legislation in Louisiana was revealed to the investing public, we checked the calendar pages from the Louisiana Senate and House of Representatives for 1976 and read the New Orleans Times Picayune every day from April 1, 1976 until August 1, 1976. That search revealed information regarding the passage of Louisiana's Right to Work Act, summarized in Table 1. Table 1 shows the days on which shareholder returns are hypothesized to have changed as a result of events related to RTW legislation, the direction of the hypothesized change, and the reason for each hypothesis. Because the battle for this legislation was largely fought out in the legislature (where organized labor believed it had the lobbying power to stop the campaign for RTW), investors' fortunes clearly should have moved up and down with related legislative events.

The legislative history of the Louisiana Right to Work Act involves two separate bills, both of which were being considered during the first half of 1976: HB 637, the bill that eventually became the Louisiana Right to Work Act, and SB 69, a bill that would have amended the Louisiana Constitution to make Louisiana a RTW state. Because both provisions transmitted information about RTW legislation to investors in Louisiana, both are relevant to the question being investigated in this paper. We included all dates on which RTW legislation was pre-filed, [16] introduced, referred to Committee, reported from Committee, subjected to attempts to amend, experienced setbacks, scheduled for a vote, voted on, or otherwise moved through the legislative process (see Table 1 for details on each event). We also included dates on which Governor Edwards, through his initial attempts to encourage amendments that would have made the bill less objectionable to unions, [17] and later through his announced support for the legislati on, clearly influenced the legislative process. The first date relevant to the analysis is April 29, 1976, when legislation was prefiled in the Senate. The final date that is included in the analysis is July 9, 1976, when Governor Edwards stated that he was prepared to sign the RTW Law. On this date, investors would have learned that Louisiana was about to become a RTW state. [18] In total, there are 14 event days in Louisiana, used for what we label Test 1A. Test lB adds the day before and the day after each of these 14 days, under the assumption that the market sometimes anticipates and sometimes responds with delay to such events, particularly when events occur late in a day.

8. Critical Events in Idaho Related to the Passage of RTW Legislation

The passage of the Idaho Right to Work Act was more complicated and took longer than the Louisiana Act. The Idaho Act moved through both houses quite quickly, being introduced into the House as HB 2 on January 9, 1985, passing the House (64-20) on January 18, 1985, passing the Senate (28-14) on January 24, 1985, and being sent to the governor on January 25, 1985. [19] Critical events for Idaho are summarized in Table 2; there are 21 event days in Idaho.

Several important events took place on January 31, 1985. First, Governor Evans vetoed the bill. On the same date that veto was overridden in the House by a 65-18-1 majority and in the Senate by a vote of 28-14. Further, when the legislature passed the law, it was designated as an "emergency bill." According to the Idaho Constitution, this meant that the law would take effect immediately upon passage. As a result, still on January 31, 1985, the AFL-CIO of Idaho filed a complaint and motion for a temporary injunction to enjoin enforcement of the law in the 6th Judicial District Court, Bannock County. Judge George Hargraves issued the temporary restraining order sought by the AFL-CIO and set a date to hear the preliminary injunction request for February 5, 1985. The restraining order meant that the law would not take effect immediately.

Throughout February, March, April, and May 1985, there were a number of dates on which various courts in Idaho continued the temporary restraining order blocking enforcement of the Idaho RTW law. Then on February 6, 1985, the Idaho AFL-CIO launched a petition drive aimed at putting the law on the 1986 ballot. According to the Idaho Constitution, the continued validity of any law passed in Idaho may be determined by the voters in a referendum if enough signatures are obtained. Eventually, on April 1, 1985, the Idaho AFL-CIO reported that it had obtained enough signatures to place the law on the ballot in November, 1986.

On the judicial front, after a number of court decisions blocking its enforcement, the Idaho Supreme Court ruled on January 29, 1986, by a 4-1 majority, that the RTW law could be enforced pending the outcome of the referendum to be held in November. Finally, on November 4, 1986, the Idaho Right to Work law was approved in a state referendum.

9. Empirical Results: Louisiana

The empirical results for Louisiana are presented in Table 3. Test 1A, the CAR for the 14 event dates in Louisiana, was 0.0294 (p-value [less than] 0.01), meaning that shareholder returns rose 2.9% over the 14 days most relevant to the passage of the Louisiana Right to Work Act. [20] Moreover, according to the sign test, there was no evidence that movements in the returns of one or two companies were driving the results. Test 1B, the 14 event days [+ or -]1 day, is also positive and significant (at 4.5%), and again the sign test is significant. This alternative (Test 1B) is especially relevant for those who believe that the stock market may either anticipate, or react with some delay, to legislative events such as those outlined in Table 1.

See the Appendix for the ARs for each event day and the CAR as of that date. ARs are significant and of the wrong sign in 3 of the 14 event days in Louisiana; some scholars have suggested that this might reflect instability in the market model. Although we cannot rule out this possibility, our experience with this type of estimation is that ARs of the wrong sign are not uncommon on individual event days (presumably due to some unknown random event affecting this same group of firms on those days) and that what is more important is the CAR for the entire event period.

We also checked results for two other event periods that are sometimes used in the study of the impact of events on shareholder returns, particularly when the precise event days are not available (Szewczyk and Tsetsekos 1992; Chandy et al. 1995). Test 2 examined shareholder returns each day from the introduction of SB 69 into the Senate on April 29, 1976 until the Act was signed by Governor Edwards on July 10, 1976. The results from Test 2 showed that CAR increased 2.2% (p-value [less than] 0.01). Test 3 examined shareholder returns over the period from April 7 until May 20, 1976. This period corresponds to day - 15 until day + 15 (with the introduction of SB 69 into the Louisiana Senate on April 29, 1976 considered day 0). Test 3 shows that CAR increased 2.9% (p-value [less than] 0.01). In other words, according to all tests, shareholder returns rose between 2.2 and 4.5% in response to the passage of the Louisiana Right-to-Work Act. [21]

Finally, we examined all three tests for the matched sample of firms that were located outside the state but in the same industries as the Louisiana companies. All tests were insignificant except for Test 2, which indicates a significant increase of 0.6% (a very small increase). Overall, the matched sample provides further reassurance that events in Louisiana, particularly on the precise event days related to the passage of RTW, are driving the results, rather than events in the industries that predominate in Louisiana.

10. Empirical Results: Idaho

The empirical results for Idaho are also presented in Table 3 (see the Appendix for the AR for each event day and the CAR as of that date). [22] For the 21 event days as a whole, the CAR is a positive and significant 2.4% (Test 1A); the sign test indicates that a small number of firms are not driving results. In the Idaho matched sample, on the days relevant to Test 1A, returns actually fell an insignificant -0.3%. Allowing the market to anticipate or react with slight delay to events (Test 1B) indicates a more sizeable impact (9.5%), with a small and insignificant impact in the matched sample (0.1%). Under Test 2 (from January 9, 1985 to November 4, 1986) shareholder returns are a positive and significant 30.3%; in the matched sample, there was similarly a very large and significant positive figure. Test 2 does not seem very appropriate here-presumably, many things besides RTW are influencing shareholder returns in Idaho corporations (and in similar corporations elsewhere) in this long, almost two-year, tim e span. Under Test 3 (from day -15 to day + 15 of the Bill's introduction: December 26, 1984 to January 24, 1985), returns are again positive, but insignificant, at 1.8%, and there is clearly no difference between the Idaho sample and its industry match.

The Idaho results are less conclusive than those from Louisiana. Presumably, this reflects the smaller sample size and the almost two-year period during which RTW was contested in the courts and in the area of electoral politics--a long span of time that inevitably introduces more variability into the movement of shareholder returns from other sources. There are indications that stability of the market model is potentially of more concern in Idaho than in Louisiana (see footnote 22), which would not be unexpected given the length of time involved. Nonetheless, we are struck by the fact that, under the best test using the precise event dates (Test 1), shareholder returns to the passage of RTW are not only positive and significant, but also are 2.4%, a number that is in the same "ballpark" as the estimate of the impact of RTW in Louisiana. For these days, there is no evidence that results are being driven by a few corporations or by events in the industries in which those corporations are located.

11. Discussion

Taken as a whole, these results indicate that the passage of RTW legislation did increase shareholder wealth and, according to investors, the expected profits of firms whose primary operating location was in a state that recently passed a RTW law. If anything, we were somewhat surprised by the magnitude of the effect: a 2 to 4% increase in shareholder wealth. Nonetheless, this magnitude is credible. Olson and Becker (1990) report that passage of the NLRA in 1935 lowered stockholder wealth by 15.9%, Ruback and Zimmerman (1984) find that a union victory in a single representation election (often in a single location in a multiplant corporation) lowers shareholder equity by almost 4%, and Becker (1987) finds that concession bargaining gains by firms increase shareholder wealth by 8 to 10%. Given these findings, the increases reported here in shareholder returns attributed to the passage of a state RTW law are plausible.

Our interpretation of these results is that RTW legislation has a positive impact on the future profits of business organizations, presumably stemming from the law's negative impact on labor unions. It is not possible here to determine whether that effect largely occurs through a reduced probability of unionization, from reduced membership or bargaining power for existing labor organizations, or through other channels. Schumacher (1999) has recently presented evidence that more extensive "free-riding" reduces union bargaining power, indicating the importance of RTW for existing union members and already organized firms. He points out, however, that it is also likely that people are less likely to join weak unions, so causality probably goes in both directions.

Although it is not possible to disentangle completely the impact of RTW legislation itself from the "anti-union" change in public opinion that produced that legislation, the chronology of RTW legislation in Louisiana (more so than in Idaho) is helpful in separating the impact of the legislation itself from the prior change in public opinion. In Louisiana, it was clear that the public supported RTW legislation before that legislation became law. Despite this, the state AFL-CIO and others anticipated that RTW could be kept "bottled up" in legislative committee. As legislative events unfolded in 1976, however, it became increasingly clear to investors that RTW legislation in Louisiana would become law and with successive legislative events, stock market returns reflected that increasing probability of RTW passage.

Other interpretations of the results from both Louisiana and Idaho are possible. One is that investors are misguided and only believe that RTW laws hurt unions and thereby increase the future profitability of firms operating primarily in a state with a RTW law, even though they actually do not. Another interpretation is that passage of the RTW law merely signaled to investors that public opinion in the State had moved in an anti-union direction or that the legislation acted primarily by actually shifting public opinion in a fashion that was adverse to unions. The public nature of the campaigns over RTW in both states argues against the view that the passage of legislation merely informed investors of a prior, unrecognized shift in public opinion. We are also skeptical that laws only operate through the vehicle of public opinion.

We do recognize, however, that legislation may have symbolic as well as real effects and that RTW legislation may not only reflect public opinion but that struggles over such laws may themselves shape the views of citizens regarding labor unions. The point of this study is not to disparage studies of such complexities, but rather to ascertain whether or not RTW laws had immediate, measurable effects, and if so, to evaluate their magnitude.

As coauthors, we went into this study with two very different perspectives on RTW laws. One of us viewed these laws as largely symbolic, reflecting preexisting anti-union attitudes in some states, and unworthy of the enormous resources devoted to them by business and labor organizations; the other perceived them to be important determinants of union strength or weakness, and more generally as representing the impact legislation has on union membership. As a result of examining a very new type of evidence, the impact of the passage of RTW legislation on shareholder wealth, we have agreed that RTW laws do matter for business and for labor organizations. Even the details of labor law have important consequences.

(*.) Department of Management, 109F Swetman Hall, SUNY-Oswego, Oswego, NY 13126, USA; E-mail [e-mail].

(+.) Rutgers University, Labor Studies & Employment Relations, 50 Labor Center Way, New Brunswick, NJ 08903, USA; E-mail [e-mail]; corresponding author.

We would like to thank Dean Crawford and Taehon Lee for the generous assistance they gave us with this research.

Received June 1998; accepted November 1999.

(1.) These are fixed-effects results and nonfixed-effects results, respectively. Ellwood and Fine exploit a pooled time-series cross-section data structure to estimate fixed-effects models for the seven states that changed RTW status after 1951. These regressions hold constant for unobserved variation in political climate across states. Ellwood and Fine also estimate nonfixed effects equations across all 50 states. Union organizing falls in the years after the passage of RTW legislation and not in the years immediately preceding passage, indicating that these laws diminish union strength, not that diminished union strength permits the passage of RTW laws. In Louisiana, an average of 4024 workers per year were organized in the three years preceding passage of the RTW law, whereas only 2380 per year were organized in the three years following passage.

(2.) Other research studies on the effects of RTW laws include Reid and Faith (1987), Farber (1984), Koeller (1985), and Hunt and White (1983).

(3.) Schumacher (1999) presents evidence that union bargaining power is lessened by larger numbers of free-riders, whereas simultaneously, people are less likely to join weak unions. RTW laws, of course, encourage free-riding.

(4.) In Idaho, RTW legislation was passed in January 1985. Because of legal challenges, however, the law initially took effect in January 1986, and became more certain when approved by the public in a referendum in November 1986.

(5.) Twenty-one states now have RTW laws, and one additional state, Indiana, had a RTW law between 1957 and 1965. The states with RTW laws and the years of adoption are listed in Ellwood and Fine (1987). The two states tested in this paper, Louisiana and Idaho, are the only states to pass RTW legislation after daily data became available for all sources of stock price data (daily stock price data are available for the New York and American Stock exchanges after July 2, 1962 and for NASDAQ after December 14, 1972).

(6.) To our knowledge, such control groups have not been used in other event studies; this procedure was suggested by anonymous referees for this article. It is a reasonable further check on our results given the size of the state samples and their concentration by industry.

(7.) These included LOCA, the Louisiana Oilfield Contractors Association; LABI, the Louisiana Association of Business and Industry; LAPEC, the Louisiana Political Education Council; ABC, the Associated Builders and Contractors; PAR, the Public Affairs Research Council, and the state Chamber of Commerce (see Canak and Miller 1990).

(8.) In 1977, two different RTW bills were introduced into the Idaho house. Whereas one of the bills died in committee, the other actually passed both houses. RTW legislation was never passed, however, because the version that passed each house was different, and the conference committee could not reconcile the differences in the two bills. Two RTW measures were also introduced in 1981, one in each house of the Idaho legislature. Although the Senate Bill died in committee, the House bill passed in the House before also dying in the Senate. Finally, a RTW law was passed by both houses in 1982, before being vetoed by Governor Evans in 1982. The House voted to override the veto but the Senate fell three votes short. (The vote to override was 21-14 and a vote of 24-11 would have been necessary to override the Veto).

(9.) In a corollary line of research, Abowd (1989), Thomas and Kleiner (1992), and Becker (1987) all find a relation between the effects of collective bargaining outcomes and shareholder wealth. Abowd reports that union-induced collective bargaining gains come directly at the expense of shareholders and shareholder wealth. Becker found that unanticipated union concessions in collective bargaining led to substantial increases in shareholder equity. Thomas and Kleiner find that two-tier wage agreements (a type of concession) resulted in small but significant increases in shareholder wealth. If, as some argue, RTW laws influence union bargaining power, then all of these studies suggest that they might affect stock prices as well.

(10.) At the time the Taft-Hartley Act was passed, 14 States had either a RTW law or a constitutional amendment requiring RTW (Abraham 1996).

(11.) The methodology used in this paper is virtually identical to that used by Abraham (1996) and Olson and Becker (1990)--two other papers that have assessed the effects of labor relations legislation with the event study.

(12.) Data on firm returns are maintained by CRSP--the Center for Research on Security Prices connected with the University of Chicago School of Business. The value-weighted index was used in our study. Both firm and market returns were transformed by a natural logarithm, In(1 + returns) before estimation. Equity returns are used to determine she impact of an event on a firm. The return to any security in time t is equal to its price change in that period plus any dividend disbursements: [R.sub.it] = ([Price.sub.it] - [Price.sub.it-1] + [Dividends.sub.it]/[Price.sub.it-1]

(13.) Details of the Burgstahler and Noreen H-statistic are described more fully in their paper. Under the null hypothesis that CAR = O, the H-statistic is distributed as a t-distribution with N -- 2 degrees of freedom, where N is the number of periods used to estimate the market model parameters in the nonevent periods.

(14.) The ARs are corrected using an analogous procedure.

(15.) Compustat has a variable called "State." According to the Compustat manual, "This code identifies primary location and conforms to the National Bureau of Standards' Federal Information Processing Standards (FIPS) codes. Under the FIPS classification system, a unique code is assigned to every state in the United States. Standard and Poor's Compustat uses this code to identify a company's primary location."

(16.) In Louisiana, a bill is prefiled when the sponsors plan to raise the bill during the term. A full copy is made available as a matter of public record. On April 29th, SB69 was prefiled, and this would be the first date on which stock prices would have been affected by the possibility that Louisiana might become a RTW state.

(17.) The compromises proposed would have: (i) excluded the construction industry, (ii) grand-fathered existing union shops, and (iii) authorized an agency shop if 75% of the employees in a plant voted in favor of one. These amendments failed.

(18.) Although HB 637 was signed by Governor Edwards on July 10, 1976, that date is probably not very relevant to the analysis. Even though the Act was officially passed on that date, everything about the law had been communicated to investors by July 9. As a result, stock prices are not expected to have risen significantly on July 10.

(19.) Idaho Statesman, the Idaho Falls Post Register, and the Lewiston Morning Tribune were consulted in constructing critical event dates.

(20.) When July 10 was included in the analysis, CAR for the 15 days was 2.31 (p-value [less than] 0.01). Thus, although shareholder returns fell on July 10, CAR remained positive and significant.

(21.) Before concluding that the passage of RTW legislation in Louisiana was responsible for an increase in shareholder returns, we did some further exploration. We ultimately found that nine of the 23 firms in our original sample were affiliated with the oil or natural gas (or both) industries. These industries had a history of union organizing and opposition to unionism that historically related to their decisions to form business organizations that were later involved in RTW efforts (see Canak and Miller 1990). For this reason, we decided to determine whether or not companies in the oil and gas industries in Louisiana experienced greater increases in CARs than other firms in the sample, CARs for each subsample were both positive. The oil and gas subsample was somewhat larger in magnitude at 3.3% (and more strongly significant) than the nonoil and gas subsample at 2.7%. However, when we formally tested to determine whether or not the CARs were different in magnitude for the two samples, it turned out that they were not.

(22.) ARs are significant and of the wrong sign on 7 of the 21 event days in Idaho; again, instability in the market model may be the culprit.

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