Layoffs, Shareholders’ Wealth, and Corporate Performance
Journal of Empirical Finance 8 (2001), pp. 171–199, doi:10.1016/S0927-5398(01)00024-X
Posted: 24 May 2013 Last revised: 30 May 2013
Date Written: May 23, 2000
We examine the relation between layoffs and stockholders' wealth, and corporate performance subsequent to layoffs. We find that layoffs are preceded by a period of poor stock market and earnings performance, and are followed by significant improvements in both. On average, layoff announcements are associated with a significantly negative stock market response, with the lowest returns associated with layoffs attributed to declining demand. We do not find any evidence that layoff announcements are followed by reduced total employment in the subsequent 3 years; however, we find evidence of improving profit margins and improved labor productivity following layoffs. We find no evidence that the eventual turnaround in firm performance following layoff decisions is due to mean reversion in accounting earnings. Finally, we find that layoff firms tend to increase corporate focus. Our findings support the view that a layoff decision is a rational response to ensure corporate survival.
Keywords: Layoffs, Corporate restructuring, Work force reduction
JEL Classification: G34, J60
Suggested Citation: Suggested Citation