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Have Employment Reductions Become Good News for Shareholders? The Effect of Job Loss Announcements on Stock Prices, 1970-97

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  • Henry S. Farber
  • Kevin F. Hallock

Abstract

We study the reaction of stock prices to announcements of reductions in force (RIFs) using a sample of nearly 3878 such announcements in 1176 large firms during the 1970-97 period collected from the Wall Street Journal Index. We note that, although there has been a dramatic secular increase in news stories related to job loss, the total number of actual announcements fro the firms in our sample follows the business cycle quite closely. We then examine changes over time in standard summary statistics (means, meridians, fraction negative) of the distribution of stock market reactions as well as changes over time in kernel density estimates of this distribution. We find clear evidence that the distribution of stock market reactions has shifted to the right (became less negative) over time. One possible explanation for this change is that, over the last three decades, RIFs designed to improve efficiency have become more common relative to RIFs designed to cope with reductions in product demand. We find that, although this explanation shows some promise, most of the decline in the negative stock price reaction remains unexplained.

Suggested Citation

  • Henry S. Farber & Kevin F. Hallock, 1999. "Have Employment Reductions Become Good News for Shareholders? The Effect of Job Loss Announcements on Stock Prices, 1970-97," NBER Working Papers 7295, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:7295
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    1. Sanford Jacoby, 1998. "Downsizing in the Past," Challenge, Taylor & Francis Journals, vol. 41(3), pages 100-112, May.
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    Cited by:

    1. Boyer, Tristan, 2002. "Gouvernement d'entreprise et décisions d'emploi [Corporate Governance and employment decisions]," MPRA Paper 10287, University Library of Munich, Germany.
    2. repec:bla:germec:v:7:y:2006:i::p:189-210 is not listed on IDEAS
    3. Bénédicte Reynaud & Arnaud Degorre, 2007. "Workforce reduction and firm performance: a comparison between French publicly-listed and non-listed companies, 1994-2000," Working Papers halshs-00588011, HAL.
    4. Michelle M. Arthur & Alison Cook, 2004. "Taking Stock of Work-Family Initiatives: How Announcements of “Family-Friendly†Human Resource Decisions Affect Shareholder Value," ILR Review, Cornell University, ILR School, vol. 57(4), pages 599-613, July.
    5. Howard Gospel & Andrew Pendleton, 2003. "Finance, Corporate Governance and the Management of Labour: A Conceptual and Comparative Analysis," British Journal of Industrial Relations, London School of Economics, vol. 41(3), pages 557-582, September.

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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs

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