Corporate Layoffs and Accounting Conservatism

Abstract

We examine whether and how accounting conservatism plays a disciplinary role in corporate layoffs. Analyzing 722 layoff announcements in Form 8-K over the period 2004 to 2012, we first document that the level of hiring on average falls short of the optimal level (i.e., under-hiring) even before the layoff. Subsequently, the layoff further exacerbates the extent of the under-hiring from -2.2 percent to -12.9 percent, relative to its optimal level of hiring. Next, we find that accounting conservatism mitigates such inefficiency in layoff decisions. Further analyses confirm that the positive relation between conservatism and layoff efficiency is mainly driven by mitigation of the extent of under-hiring from layoffs. Finally, we find that layoff firms with more conservative accounting issue more debt around the layoff announcement, suggesting access to more debt financing as a possible channel underlying the positive impact of conservatism on layoff efficiency.

Keywords: Accounting Conservatism, Layoff, Layoff Efficiency, Restructuring, Downsizing, Form 8-K

JEL Classification: E24, G34, J53, J63, M41, M51, M54