Corporate layoffs and competition

Abstract

The primary aim of this study is to analyze industry effects of corporate layoff announcements. We document that while the stock prices of firms announcing layoffs experience a significantly negative stock price reaction, an equally-weighted portfolio of all firms ,within the industry experiences a significantly positive stock price reaction Although this result is consistent with a net competitive effect, we find evidence that contagion and competitive effects could happen simultaneously Results consistent -with competitive effect are observed for those rivals that either belong to low-leverage industries, are in industries of firms whose announcement did not contain any adverse information regarding the industry or when a dominant firm in the industry announced the layoff results consistent ,with the contagion effect are observed for those rivals that have high Tobin's q or sales growth and which belong to industries where the layoff announcement contained adverse information regarding the industry. The overall portfolio and cross-sectional analyses provide results that are generally consistent with a dominant competitive effect.