The Upside to Downsizing: Mispricing Layoffs and Firm Value

71 Pages Posted: 11 Dec 2015 Last revised: 4 Mar 2024

Date Written: November 15, 2015

Abstract

Contrary to popular opinion, one-third of mass layoffs announced by S&P 500 firms do not result in downsizing, yet the market fails to identify this anomaly in the short-run. Therefore, I construct a real-time layoff index to predict the probability of downsizing following an announcement and show that an investment strategy, long in the bottom half of the index (Downsizing), generates an annual four-factor alpha of 6.96%. Downsizers create value in the long-run because they successfully reduce costs, increase liquidity, and improve performance. Importantly, Downsizers also ensure that managers commit to downsizing by raising additional debt prior to the announcement.

Keywords: Mispricing, Layoffs, Firm Performance, Human Capital Disclosure, Involuntary Turnover

JEL Classification: G14, J63, G32, L25

Suggested Citation

Kannan, Bharadwaj, The Upside to Downsizing: Mispricing Layoffs and Firm Value (November 15, 2015). Available at SSRN: https://ssrn.com/abstract=2701363 or http://dx.doi.org/10.2139/ssrn.2701363

Bharadwaj Kannan (Contact Author)

Colorado State University ( email )

Fort Collins, CO 80523
United States

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