Layoffs, Shareholders’ Wealth, and Corporate Performance

Journal of Empirical Finance 8 (2001), pp. 171–199, doi:10.1016/S0927-5398(01)00024-X

University of Alberta School of Business Research Paper No. 2013-224

Posted: 24 May 2013 Last revised: 30 May 2013

See all articles by Peter F. Chen

Peter F. Chen

Hong Kong University of Science & Technology (HKUST) - Department of Accounting

Vikas Mehrotra

University of Alberta - Department of Finance and Statistical Analysis

Ranjini Jha

University of Waterloo - School of Accounting and Finance

Wayne Yu

City University of Hong Kong

Date Written: May 23, 2000

Abstract

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

Chen, Peter Fusheng and Mehrotra, Vikas and Jha, Ranjini and Yu, Wayne, Layoffs, Shareholders’ Wealth, and Corporate Performance (May 23, 2000). Journal of Empirical Finance 8 (2001), pp. 171–199, doi:10.1016/S0927-5398(01)00024-X; University of Alberta School of Business Research Paper No. 2013-224. Available at SSRN: https://ssrn.com/abstract=2269314

Peter Fusheng Chen

Hong Kong University of Science & Technology (HKUST) - Department of Accounting ( email )

Clear Water Bay
School of Business & Management
Kowloon
Hong Kong PRC
852-2358-7572 (Phone)

Vikas Mehrotra (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

School of Business
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-2976 (Phone)
780-492-3325 (Fax)

Ranjini Jha

University of Waterloo - School of Accounting and Finance ( email )

200 University Avenue West
Waterloo, Ontario N2L 3G1 N2L 3G1
Canada

Wayne Yu

City University of Hong Kong ( email )

Kowloon
Hong Kong

Register to save articles to
your library

Register

Paper statistics

Abstract Views
370
PlumX Metrics