Date of Award

Spring 1-1-2016

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Finance

First Advisor

Edward Van Wesep

Second Advisor

Roberto Pinheiro

Third Advisor

J. Anthony Cookson

Fourth Advisor

Diego Garcia

Fifth Advisor

Mattias Nilsson

Abstract

The first chapter presents evidence showing that layoff announcements mostly contain medium and long-run industry-wide news. That is, competitors’ stock price reactions are positively correlated with the announcer's return. This contagion effect is stronger for competitors whose values depend on growth opportunities. In particular, when a layoff announcement induces positive stock returns to the announcer, competitors with positive R&D see a 1.15% increase in their returns. This effect is stronger in highly competitive technology industries, indicating that the layoff announcements signal new growth opportunities. Conversely, when a layoff announcement induces negative stock returns to the announcer, competitors with high sales growth see a reduction of 1.09% in returns, implying that industry prospects are deteriorating. Our findings suggest that investors perceive layoffs as changes in growth options rather than changes in competitive environment.

The second chapter shows that contrary to popular belief, layoff announcements do not always lead to reduced employment. Using hand-collected data on layoff announcements for S&P 500 firms, I show that 32% of layoffs announced do not lead to employment downsizing. While the market, in the short run, does not react differently to announcements that do and do not lead to downsizing, firms exhibit significantly higher buy-and-hold abnormal returns in the following 300 days when their announcement leads to downsizing. I create a real-time index to predict the probability of a layoff leading to employment shrinkage and show that a simple long-short strategy based on this index will generate abnormal returns of 9.5% - 10.8%. Abnormal returns are strongest in high union coverage industries implying that when firms successfully bargain with workers to downsize, they benefit the most. I find that firms use poor performance and high leverage as sources of commitment to bargaining. Overall, my results suggest that layoff decisions, depending on their type, have important implications for long term performance and corporate policy.

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