The effects of layoff announcements on common stock prices

Abstract

This event study of the stock market analyzes the effect of layoff announcements on common stock prices. The analysis finds that, on average, stock prices have a negative reaction to layoff announcements. However, for the month following the announcement, stocks have positive abnormal returns in effect equalling the negative abnormal returns surrounding the event day. The study also addresses the question of whether the business cycle influences the reaction in the stock market to layoff announcements. The findings suggest that there is a business cycle influence. The layoff announcements are also categorized and analyzed by several other criteria. First announcements are found to carry much more negative information than additional announcements. Plant closing layoff announcements report a more negative reaction. Different industry types are found to react uniquely to the layoff announcement and the stated reason by management for the layoff has little influence on the stock market reaction.