layoff
TRANSCRIPT
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…