Economic Links and the Wealth Effects of Layoff Announcement Along the Supply Chain
Posted: 15 Jan 2019 Last revised: 9 May 2019
Date Written: January 1, 2019
This paper examines whether suppliers suffer from information externalities when their major customers make layoff announcements. We find suppliers, on average, experience a negative stock price reaction around their major customers’ layoff announcements. Furthermore, the negative price effect is exacerbated when the industry rivals of layoff-announcing customers also suffer from negative intra-industry contagion effects, indicating that the interaction of vertical and horizontal effects can have an impact on the magnitude of supply chain information externalities. Additionally, our results show that the supply chain spillover effects are asymmetric, with only “bad news” layoff announcements causing significant value implications for suppliers, but not “good news” announcements. Supplier firms also reduce their investments and sales dependence on layoff-announcing customers and experience a higher profit margins and investment profitability in the subsequent years.
Keywords: Information externality, Corporate layoffs, Supply chain relations
JEL Classification: J63, G14
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