Effect of Layoffs on Stock Price

Kim NguyenMinh Thao NguyenMark Moskvitine

Introduction

Layoffs are a common way to quickly reduce costs

In bad economy more companies may be forced to make layoff decisions

We want to see if there are consequences to the share price of firms that layoff workers

Literature Review

Generally, layoffs viewed as positive (do not affect or increase stock price):

- when they are a response to unanticipated problems

- when they indicate improved future efficiency

- when there is no information about layoff (investors give the firms the benefit of a doubt)

Literature Review

Generally, layoffs viewed as negative (decrease stock price):

- when they are a response to problems that could have been anticipated by the management

- when layoffs indicate declining growth opportunities and decreased future cash flows to the firm

- when good firms layoff, they experience negative abnormal returns; below-average firms tend to not experience losses

Literature Review

Previous research supports the declining growth opportunities hypothesis: investors mostly view layoffs negatively.

Literature Review

There are many variables that cause layoffs to produce larger or smaller negative impact on stock price:

- the size of layoff (larger more negative return)

- Duration of layoff (longer more negative return)

- Reasons for the layoff + (foreseen layoff less negative return)+ ( financial distress layoffs more negative return than restructuring layoffs)

Literature Review

More variables that cause layoffs to produce larger or smaller negative impact on stock price:

- Firm performance compared to industry average (doing well, above-industry- average firms more negative return)

- Business cycle (contraction phase more negative market reaction)

- Service firms are more likely to experience negative returns than manufacturing firms

Data & Methodology

Took 1.5 year stock data for 30 companies from WSJ list of layoff announcements in the first quarter of 2009

- Companies had to be well-known, prestigious (AMD, Pfizer)

- Only layoffs of or exceeding 8% of total workforce

- Companies had to be listed on either NYSE or NASDAQ to insure completeness of data

- Tested layoff announcement date

Data & Methodology

Layoff Announcement

- 350 - 50 -5 50

Estimation Period Testing Period

Event Analysis Design

H0 AR = 0HA AR <>0

Results

The results were consistent with the previous studies

- 11-day Average CAR was -0.94%

- t = -3.14 < -1.69, two-tailed, at 0.05 interval

- The result was significant.

Limitations/Extensions

Limitations

- There may have been layoff rumors or information leaks – not captured by the test

- Only 30 stocks in the sample

Extensions

- Isolate the sample by industry to see whether there is a difference in AR between industries

- Analyze stocks from different countries to see whether that will have an effect

Implications for Investors

- Do research on top management, if they fail to foresee problems leading to layoffs, the stock will fall

- Unlike in the 1990’s, today layoffs do not mean a jump in share price, but rather the opposite

- Companies that lay people off must prove that layoffs really did increase efficiency, or lose credibility

Lessons for the Top Management

- Best employees may panic after layoffs and start looking for other jobs

- Overall morale and productivity decreases after layoffs

- Employees view layoffs as a violation of a psychological contract between them and the company, especially when it emphasizes caring for its employees

- Employee loyalty and customer loyalty are correlated

Questions…