Downsizing, Corporate Performance, and Shareholder Wealth

Abstract

Restructuring events, such as downsizing, can either halt a downward spiral in corporate performance or perpetuate that downward spiral (Lindsley, Brass and Thomas 1995). This dual nature of downsizing is reflected in the mixed results found by prior researchers.We recognize the dual nature of downsizing by categorizing events according to the firm’s financial condition preceding the announcement of the downsizing. We find a significant negative stock price reaction for firms that are financially healthy in the period preceding the announcement of the downsizing, but a statistically smaller reaction for firms that are in financial distress. The results suggest that the stock market views downsizing events consistent with the theory proposed by Lindsley, Brass and Thomas (1995).

Layoff announcements and intra-day market reactions

“…The possibility of information leakage has been noted in other studies (Franz et al 1998;Chatrath et al 1995;Brookman et al 2007). Additionally, Lee (1997) questioned if large shareholders in Japan can Layoff announcements and intra-day market reactions 217 respond to layoff announcements beforehand because they may have access to relevant information before the news is made public.…”

“…Examples of negative news include declining sales, money losses, unexpected lower earnings, signals that the firm and/or its growth opportunities are in a more precarious state than previously thought, closure of plants or facilities, negative revision of future operating prospects, new information about adverse market conditions, or an insufficient layoff (Worrell et al 1991;Lin and Rozeff 1993;Chatrath et al 1995;Palmon et al 1997;Elayan et al 1998;Chen et al 2001;Capelle-Blancard and Couderc 2006;Hillier et al 2007). Negative market reactions have been observed in studies by Worrell et al (1991), Lin and Rozeff (1993), Lee (1997), Elayan et al (1998), Franz et al (1998), Hallock (1998), Chen et al (2001), Nixon et al (2004), CapelleBlancard and Couderc (2006), and Hillier et al (2007). Last, Goins and Gruca (2008) found that layoff announcements result in a negative but statistically nonsignificant market reaction.…”

“…In addition, studies show that a company's financial performance, in fact, deteriorates after layoffs (De Meuse et al 1994). Other negative consequences include loss of valuable knowhow and triggering of negative attitudes, for example, increase in fear and a drop in motivation, morale, punctuality, and general satisfaction among the workers who are not laid off (Cascio 1993;Franz et al 1998;Wayhan and Werner 2000;De Meuse et al 2004).…”

Bewertung von Personalabbauprogrammen aus Aktionärssicht – Eine Bestandsaufnahme der empirischen Ereignisstudien-Forschung –

“…31 Abraham (2004); Collett (2002); Clarenbach und Davies (2001); Wertheim und Robinson (2000); Pouder et al (1999); Ray und Forsyth (1999u. 2002; Franz et al (1998); Elayan et al (1998); Davidson et al (1996); ; Worrell et al (1991). 32 Lediglich die Studie von Worrell et al (1991) kommt diesbezüglich zu abweichenden Ergebnissen.…”

“…33 Während Franz et al (1998) und Collett (2004 signifikant positive DKAR in den ersten ein bis zwei Jahren nach dem Ereignis ausweisen, stellen , Ray und Forsyth (1999 und Abraham (2004) für eine Zeitspanne von bis zu zwei Jahren nach der Ankündigung signifikant negative DKAR fest. In den Untersuchungen von Worrell et al (1991), Davidson et al (1996), Pouder et al (1999) und Chen et al (2001) verändern sich die DKAR nach einem PAP-Plan außerhalb eines engen Zeitintervalls um das Ereignis nicht signifikant negativ oder positiv.…”