Layoffs are commonly used to quickly reduce costs. This study examined the effect of layoffs on stock price by analyzing the stock performance of 30 large companies that announced layoffs of 8% or more of their workforce in early 2009. The results found that on average, stock prices declined by 0.94% within 11 days of announcing layoffs, supporting previous research that layoffs are generally viewed negatively by investors. However, factors like the size, duration, and reasons for layoffs can influence the magnitude of the stock price reaction. The study was limited by its small sample size and inability to account for potential layoff rumors, and could be extended by analyzing differences across industries or countries.

1. Effect of Layoffs on Stock Price
Kim Nguyen
Minh Thao Nguyen
Mark Moskvitine

2. 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

3. 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)

4. 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

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

6. 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)

7. 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

8. 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

9. Data & Methodology
Layoff Announcement
- 350 - 50 -5 50
Estimation Period Testing Period
Event Analysis Design
H0  AR = 0
HA  AR <>0

10. 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.

11. 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

12. 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

13. 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

14. Questions…