This paper identifies an externality of a firm's unionization that affects the capital structure decisions of other, non-unionized firms within a local labor market. We find that a union victory leads non-unionized firms to increase their market leverage ratios by 0.9 to 1.3 percentage points. This 'shadow union' effect is more pronounced when the probability of unionization rises in a larger margin and firms face higher union rents conditional on being unionized, which is consistent with the heightened threat of unionization following shadow union organizing. The threat is credible enough to shape corporate financing decisions: shadow unions raise wages of employees and increase the likelihood of subsequent union victories in the relevant labor market. The findings suggest that a shadow labor market institution creates a strategic incentive for non-unionized firms to use less conservative financial policies to combat the union threat.​

Keywords: Shadow Union, Capital Structure, Local Labor Market, Threat of Unionization
JEL Classifications: J51, G32, J31, J42​