A Case for Human Capital Disclosure: Market Mispricing and the Upside to Downsizing

65 Pages Posted: 11 Dec 2015 Last revised: 3 Mar 2023

Date Written: November 15, 2015


Inadequate human capital disclosure requirements have meant that we know little about the effects of long-term involuntary employee turnover on the firm. Contrary to popular belief, a third of mass layoffs announced by S&P 500 firms do not result in downsizing. As the market fails to identify this anomaly in the short-run, I construct a real-time layoff index to predict the probability of downsizing following an announcement. An investment strategy that is long in the bottom half of the index (Downsizing firms) generates an annual four-factor alpha of 6.96%. Downsizers benefit in the long-run when they successfully reduce costs, raise liquidity, and improve operating performance. I also find that Downsizers raise financial leverage prior to their layoff to simultaneously transfer the increased risk onto their workers and ensure that managers commit to downsizing. Overall, my results show that involuntary turnover triggered by layoff announcements have important implications for long-term performance. There is thus an urgent need for stricter requirements on human capital disclosure.

Keywords: Human Capital Disclosure, Market Efficiency, Layoffs, Leverage, Firm Performance

JEL Classification: G14, J63, G32, L25

Suggested Citation

Kannan, Bharadwaj, A Case for Human Capital Disclosure: Market Mispricing and the Upside to Downsizing (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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