Academic journal article Journal of Managerial Issues

The Influence of Corporate Governance on Investor Reactions to Layoff Announcements

Academic journal article Journal of Managerial Issues

The Influence of Corporate Governance on Investor Reactions to Layoff Announcements

Article excerpt

Researchers in strategy often use agency theory to explain problems arising from the separation of ownership and management in corporations. These so-called agency problems occur when managerial activities fail to maximize shareholder value. For example, managers might implement strategies that promote their own long-term interests rather than the interests of shareholders. Efforts to attenuate agency problems focus on adopting governance practices that seek closer alignment of shareholder and manager interests (Fama and Jensen, 1983). Agency theory proposes that the board of directors monitors managers and constrains implementation of inefficient strategies (Zahra and Pearce, 1989). Strategies ratified by the board that represent shareholder interests should be positively associated with shareholder value (Baysinger and Butler, 1985).

Shareholder activists base their movement for corporate governance reform on principles of agency theory (Lorsch, 1996), arguing that agency-based corporate governance practices increase shareholder value. Through their collective influence, activist groups have brought about significant changes in governance practice. However, the impact of these changes has not consistently improved shareholder value in all strategic contexts, suggesting that research in this area should focus on individual strategies.

While often mentioned in accounts of poor governance (e.g., Byrne, 1997; Lear and Yavitz, 1997), a strategy unexplored in the research literature is layoffs -- the most commonly used form of organizational downsizing (Cameron, 1994). Business Week reports, "Rarely a week passes without the announcement of yet more cutbacks, in what has become the most unsettling and disruptive event in corporate America. . . In [1994's] first quarter, employers announced an average of 3,106 cut-backs per day" (Byrne, 1994: 61). Layoffs can cut costs and promote more efficient use of labor resources. On the other hand, they can have considerable negative psychological, social, and economic effects. Perhaps most obvious is the emotional trauma and economic hardship that laid-off employees must endure. Less obvious are unanticipated costs such as employee lawsuits, loss of innovation and productivity among survivors, additional consulting fees, hiring full- or part-time workers to fill unforeseen employee gaps, and negative rep utation effects that make it difficult to hire qualified employees (Banham, 1995; Cameron et al., 1991; Falter-mayer, 1992). Because shareholders are removed from the managerial decisions that determine the ultimate costs of layoffs, they have turned to governance practices as a means of aligning managers' decisions with their interests.

Empirical research on the performance implications of layoffs generally focuses on the impact of layoff announcements on shareholder wealth (e.g., Chadwell and Filbeck, 1994; Chadwell and Webb, 1996; Lee, 1997; Palmon et al, 1997; Ursel and Armstrong-Stassen, 1995; Worrell et al., 1991). However, no study to date incorporates the effect of governance practices on shareholder wealth in the context of layoff announcements. Effort in this direction seems to be useful given the simultaneous rise and importance of the governance movement and corporate layoffs. This study examines the impact of governance practices advocated by activist groups on shareholder value in the strategic context of layoffs. We draw from three conceptual perspectives to explore an empirical link between characteristics of governance and the market's assessment of managerial decisions to lay off employees. First, we use strategic management's proposition that managerial strategy influences firm performance. Second, as noted, agency theory is the basis for assuming that better governance practice influences the choice of strategies that maximize shareholder value. Third, we use capital market theory to capture investors' evaluation of a firm's layoff strategy on future performance. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.