Impacts Of Strikes On Firm Value

This paper tries to shed light on the relationship between strike activities and firm value. Do strikes affect firm value? It seems that it is not hard to answer this question. Intuitively,Strikes certainly damage firm values. However, Chinese labor economists do not provide strong evidence to prove this point as their foreign counterparts do. To prove a point academically, one must provide convincing evidence.And another question is:Does the Chinese capital market react to the strikes? After a careful review of literature, I found that foreign scholars have a long history of studying strikes. They started to study a series of issues regarding strikes such as the contributing factors of strikes, the process of collective labor negotiations, etc. since 1920s.When it comes to the relationship between strike activities and firm values, there is empirical evidence supporting both negative and insignificant influence. No evidence supports a positive link. Empirical studies rely heavily on data collection. Due to the difference in labor practice and the unionization of workers, it is very hard to find detailed data of labor negotiations, labor disputes, etc. As a result, it is very difficult to carry out similar researches in mainland China. Probably, this is one of many reasons why there are so few empirical studies of strikes in China, especially those in an economical or financial manner. It seems that Chinese legal writers are more interested in this issue than economists. They are interested in whether the workers should be granted the rights to protest, and whether there should be a specific law to regulate strike activities, etc. Due to these constraints, this paper only carries out a case study to find out the relationship between strikes and firm values. Empiricalstudies can provide statistical evidence, while case studies can conduct a thorough examination of the events, providing more insights about the company, the workers, and the capital market. Shanghai Met (Group) Corporation is a private Shanghai textile manufacturer listed in Shanghai Stock Exchange since May 1993.During the Asian financial crisis in the late 1990s, the Chinese textile industry suffered a great loss due to declines in exports. And Shanghai Met was not an exception.After a major performance meltdown, this company started to transit to bio-technology since 2000. However, it was never easy. It was also the beginning of years of frequent major shareholder change of the listed company. The controlling shareholder changed 6 times in 9 years. The strike, as a result of poor corporate governance, occurred in 2004 and lasted over a year. It was reported that a deliberate wage deduction caused the strike in the beginning. Then another article stated that the workers chose to strike because they did not believe that the company could pay them timely. In the end, the company announced that it decided to suspend operation in order to stop corruptive executives from embezzling company assets. Though the company denied the existence of strike and accused media of untrue reports (one month later the company admitted that "operation suspension" existed), the price of the company stock dropped significantly on the reported strike day, which was revealed almost a week later. This one-year-long strike ended 13 months later and several other strikes occurred in its subsidiaries in the next three years. These strikes, as the company announced later, contributed to its final decision to peel off all of its textile operation and to become a pure bio-technology company. Due to the labor practice in China, I did not find any information regarding labor unions in this event. This is a possible flaw of this study. This provides us with a unique opportunity to study the role of strike in company transition and market reaction of strike in China. China now desperately wants to transform from "made in China" to "created in China", and this Shanghai Met case can be seen as an example of thousands of other Chinese companies who are undergoing similar process. What happened in that company may just be a few of what happened and will happen in other Chinese companies.China is an economy in transition. Since the open-up reform in the late 1970s, the country has changed a lot. In this study, the gradual change of labor practice is of special relevance. Before the reform, there was absolutely no labor mobility in China. After the reform, China’s labor practice shifted from the life-long iron-bowl system to a more flexible and autonomous system based on contracts. This change was adapted because the ruling party wanted to "catch up" with the "advanced west" in a short time. Though China’s reform was often depicted as a reform of no losers, Chinese workers obviously made a great contribution to this larger reform. They lost their job security in the reform, something the fonders of the country granted them. China was never rich enough to address the problem of the welfare of hundreds of millions of its working class. And the transition of labor practice worsened the situation. The number of labor disputes went sky rocketing since the reform is largely due to this. Reviewing the history, labor relation played an important role in every reform. If China wants to succeed in the industry upgrade reform, it can never neglect this issue. The workers have made their contribution in the last reform. With the awakening of their own rights, it is becoming harder and harder to make them do the same thing again. If China wants another successful reform, it has to do it in a different way. This is one of the reasons why this study is important. This study tries to contribute to the larger process by studying this case. It also contributes to the literature of implicit contracts between the Chinese government and the workers. This paper carries out a financial statement analysis of the company from one year before the year when the strike occurred to one year after that, including profitability, operational capacity, short-term solvency, and long-term solvency. Then I calculate the company’s cumulative abnormal return (CAR) and buy-and-hold abnormal return (BHAR) of during the time period from 15 days before to 15 days after the day of the strike occurred and resolved to study the market reaction of the company stock. I also looked up to the data of the divergence of the wages between the executives and normal workers in the textile industry. The results suggest that 1.) The strike undermined the company profitability significantly.The key ratios of the company were of no significant difference from the industry average, but some of them, such as the return on assets (ROA) and the return on equity (ROE) of the company, became significantly lower than the industry average one year after the strike. Some ratios, such as the asset turnover ratios, even improved after the strike. After a careful analysis, I believe it was due to a significant increase in the bio-tech revenue, which is largely paid in cash.2.) Chinese capital market timely reacted to the event though the company denied the existence of a strike in the first place. On the reported day when the strike began, the cumulative abnormal return and the buy-and-hold abnormal return of the company stock almost plummeted. While on the reported day when the strike resolved, the cumulative abnormal return and the buy-and-hold abnormal return of the company stock recovered in a scale smaller than that on the strike day.3.) In the long term, the strike played an active role in the company’s transition and finally contributed to the growth of Shanghai Met’s value. Especially after 2010, the year in which the company totally peeled of its textile assets, the buy-and-hold abnormal return of the company stock went up in a significant scale compared with the textile company. The same thing happened "in Warren Buffet’s Berkshire Hathaway Co., which also used to be a textile company. After a series of strikes and protests, Mr. Buffet decided to abandon the textile industry and changed the company into a financial holding company.