Market reactions, characteristics, and the effectiveness of corporate layoffs


This paper develops and examines two hypotheses related to the market reaction to corporate layoff announcements: the efficiency hypothesis and the declining investment opportunities hypothesis. Additionally, the paper examines the characteristics of layoffs and the effectiveness of layoffs as a method to increase the efficiency of the firm and its labor force. The main conclusions of the paper can be summarized as follows: 1. The announcement effects of the total sample suggest that layoff announcements reveal negative information about a firm, perhaps indicating that the firm has fewer investment or growth opportunities, or less potential for future cash flows. This evidence is consistent with the declining investment opportunities hypothesis. For firms with above-average performance for their industry as measured by the average two-year ROE, NI/EM and SL/EM, the negative information contained in the layoff announcement causes investors to revise their expectations downward, while for companies with below-industry-average performance, the market seems to be aware of the financial difficulties of the firm and anticipates the layoff; thus, there is no significant market reaction to the layoff announcement. The pre-announcement period shows a statistically significant negative GAER, which suggests that corporate layoffs take place after a period of decline in the market value of equity of companies announcing layoffs. 2. Large layoffs result in a stronger negative market reaction than small layoffs, permanent layoffs have more negative and statistically significant announcement effects than temporary layoff announce-ments (which is not statistically significant), and companies with a recent history of layoffs (where the layoff is anticipated) are associated with less announcement effect than firms where the layoff is not anticipated. 3. The market perceives the layoff announcements where the stated reason was unprofitable operations to reflect worsening conditions for the firm. Thus, the announcement period GAER were more negative relative to layoff announcements where the stated reason was to restructure firm operations and to cut costs. 4. There is a significant difference in the market reaction to layoff announcements across industry type. Firms which rely more heavily on human capital are more sensitive to an alteration in human capital and are more adversely affected by layoff announcements relative to companies which rely more on physical capital. 5. Corporate layoffs increased the efficiency of the firm and its labor force. This is evidenced by a significant increase in the absolute value of ROE and NI/EM and in a significant increase in the percentage change of these variables in the post-announcement period relative to the pre-announcement period.


Finance and General Business

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Journal of Business Finance and Accounting