Stock Prices' Reactions to Layoff Announcements
Kashefi, Javad, McKee, Gilbert J., Journal of Business and Management
Despite continuing economic expansion and low unemployment, companies laid off about halfa million workers between 1992-1998. The reasons for this massive workforce reduction vary from disappointing sales growth, slowdowns in orders from international markets (particularly Asian countries), off-shore and maquiladoras production in Asia and Mexico which reduced labor costs, and reductions in payroll expenses to become competitive and to improve the bottom line of the business. Analysts often argue that a layoff announcement is a form of informational signaling to investors that the firms management has embarked on plans to boost the company's stock.
This paper examines stock price reaction to layoff announcements over a seven-year period. A sample of 174 layoff announcements involving U.S. companies occurring between 1992 and 1998 is analyzed. Our findings support the hypothesis that layoff announcements do indeed convey information useful for the valuation of firms. We find positive abnormal returns for the firms with proactive announcements and negative abnormal returns for the firms with reactive announcements
Large-scale layoffs and downsizing are reshaping corporate America. During the period 1992 - 1998, Fortune 1000 firms in the US laid off about half a million workers. General Motors Corporation, for example, announced plans in July 1998 to lay off more than 50,000 employees, or 22% of its work force, in order to become more competitive (Blumenstein, 1998) and Northwest Airlines issued notices to 27,500 employees representing 55% of its work force to reduce its payroll expense, which topped $3 billion in 1997 (Carey, 1998). When Boeing's overseas sales were impacted by Asia's economic problems, the company announced sharp production cutbacks for almost every jetliner model, a decision which eliminated 20,000 jobs on top of already announced cuts of 28,000 jobs in the previous year.
Numerous empirical studies have been conducted on various aspects of layoff announcements. For example, O'Shaughnessy and Flanagan (1990) studied the determinants of layoff announcements following mergers and acquisitions. Another study analyzed top management turnover following M&As (Cannella & Hambrick, 1993). While merger announcements have been linked to stock prices, Caves and Kreps (1993) found no support for the argument that merger activity influences the magnitude of the stock market's reaction to layoff announcements.
Hallock (1998) examined the connection between layoffs, executive pay, and stock prices. Cody, Hegemon and Shanks (1987) and Heenan (1989) investigated the impact of layoffs on employee morale and organizational effectiveness. McCune, Beatty, and Montango (1988) examined the design and implementation of layoffs. The evidence concerning the impact of corporate layoffs on the value of the firm is limited and controversial. Lin and Rozeff (1993) examined the relation between stock returns and a set of operating decisions, including layoffs, operation closings, and pay cuts. They found that changes in operations tend to be affected after the stock of the company has experienced substantial negative abnormal returns. Also, they found that temporary layoffs, permanent layoffs, and temporary operation closings are associated with negative abnormal returns. Their focus was on the comparison of different measures of cost cutting, including layoffs, when they developed a model to explain the behavior of market reaction to layoffs. Abowd, Mikovich and Hannon (1990) examined the price effects of a number of human resource decisions, including layoffs, and found no consistent valuation impact from the announcements. Worrell, Davidson, and Sharma (1991) examined the stock market response to layoff announcements, and they found that investors reacted negatively to announcements attributable to financial reasons. Their main focus was to examine whether the market reacts to layoff announcements and not to develop a testable hypothesis that would explain the behavior of the stock market around the time of announcement of corporate layoffs. …