Union-firm bargaining and the influence of product market power and production technology on systematic risk

The relationship between the CAPM firm beta and the firm’s microeconomic decisions is studied by a model under uncertainty, which combines the feature of an ex ante ‘inputs substituable’ production technology and the existence of a union which bargains over various economic dimensions of the firm. It is shown that the earlier findings of a relationship between the firm beta, the firm product market power, and the labor-capital ratio may be reinforced through the indirect channel of labor market bargaining, but the relationship becomes more complex, and heavily depends on the scope of the union-firm bargaining process. This yields the empirical prediction, confirmed for a panel of Belgian firms, that any proper estimation of the determinants of firm beta, must control for firms in the sample being unionized.