Market Reactions, Characteristics, and the Effectiveness of Corporate Layoffs

Two hypotheses are considered to explain employee layoffs by corporations: (1) the declining investment opportunities hypothesis; and (2) the efficiency hypothesis. The stock market response to employee layoff announcements is estimated to be negative, which is consistent with the declining investment opportunities hypothesis as opposed to the efficiency hypothesis. Large, permanent, and unanticipated layoffs are associated with higher market reaction relative to small, temporary, and anticipated layoffs. A significant difference exists between industry type and for the stated reason of the layoff. Corporate layoffs per se increased the efficiency of the firm, as evidenced by a significant increase in return on equity and net income to employee in the post-announcement relative to the pre-announcement period.