Employee Downsizing Strategies: Market Reaction and Post Announcement Financial Performance

Abstract

Empirical studies have generally reported insignificant market reactions to employee downsizing. In an effort to reconcile ongoing layoffs with inconclusive empirical results, we segregated our sample by downsizing strategy and examined employee layoff announcements made by "Fortune 500" firms during the 1993-1995 period. Unlike previous studies, we find a positive market reaction for layoff announcements related to revenue refocusing. Market reaction with respect to layoff announcements involving cost cutting was insignificant while weak evidence was found for a negative market reaction to layoffs related to plant closings. Consistent with the market reaction, post announcement analysis revealed that downsizing in conjunction with revenue refocusing (plant closing) improved (reduced) firm financial performance and that revenue refocusing firms significantly outperformed cost cutting and plant closing firms over the three-year post announcement period. Copyright Blackwell Publishers Ltd 2002.

Layoff announcements and intra-day market reactions

“…In addition, the dummy variable is statistically insignificant and suggests that no statistically significant relationship exists between reasons stated for layoffs and the market Marshall et al (2012) and Farber and Hallock (2009) and indicate that company background characteristics are not statistically related to a stock market reaction to layoff announcements. Our results also simultaneously contradict other papers (Chatrath et al 1995;Palmon et al 1997;Elayan et al 1998;Chalos and Chen 2002;Capelle-Blancard and Couderc 2006). Therefore, our results provide strong evidence against Hypothesis 4.…”

“…Furthermore, Wertheim and Robinson (2000) argue that the market reacts differently depending on whether the layoff announcement signals financial distress or potential benefits. In line with this, the results by Chalos and Chen (2002) show that layoff announcements about plant closings resulted in slightly negative market reactions whereas those about strategic plans to refocus lines of business resulted in statistically significantly positive abnormal returns.…”

“…Some studies, however, provide evidence of positive responses (e.g., Brookman et al 2007). Various studies also report mixed results, highlighting the relevance of the reasons for the layoff (e.g., Lin and Rozeff 1993;Chalos and Chen 2002) or the market conditions at the moment of the announcement (Farber and Hallock 2009;Marshall et al 2012). One potential reason that explains the existing mixed findings can be due to the sampling frequency of data.…”

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

“…Sollte der Nachfrageeinbruch alle Anbieter in einem Markt betreffen (z.B. bei Modeprodukten oder der Substitution einer etablierten durch eine neue Absatzleistungskategorie), dann beschert die Bekanntmachung eines PAP-Plans nicht nur den Aktionären des unmittelbar betroffenen (ankündigenden) Unternehmens, sondern auch den Eigentü-mern seiner (börsennotierten) Wettbewerber eine signifikant negative Kursreaktion 15 S. Chalos und Chen (2002), S. 851f.…”

“…22 PAP haben drittens einen negativen Informationsgehalt für die Aktionäre des schrumpfenden Unternehmens, wenn solche Maßnahmen des Managements als Indiz für einen bislang nicht vollständig bekannten, sich krisenhaft verschlechternden Gewinn-und Liquiditätstrend eines ohnehin bereits "angeschlagenen" Unternehmens eingestuft werden. Eine solche Deutung liegt vor allem nahe, wenn das Unternehmen Investoren im Vorfeld einer PAP-Ankündigung eher "vorsichtig" auf sich verschlechternde Finanzkennzahlen oder gar auf Insolvenzgefahren hinge-20 S. Farber und Hallock (2004), S. 16;Chalos und Chen (2002), S. 852f.…”