In bad times and increasingly even in good times, layoffs have become a way of life in the US, and until the Wall Street meltdown, Europe’s been under increasing pressure to follow our lead. But according to a Newsweek article by Stanford professors Jeffrey Pfeffer and Robert Sutton,
there is a growing body of academic research suggesting that firms incur big costs when they cut workers.
It’s difficult to study the causal effect of layoffs—you can’t do double-blind, placebo-controlled studies as you can for drugs by randomly assigning some companies to shed workers and others not, with people unaware of what “treatment” they are receiving…. But you can attempt to control for differences in industry, size, financial condition, and past performance, and then look at a large number of studies to see if they reach the same conclusion. That research paints a fairly consistent picture: layoffs don’t work.
Don’t layoffs push stock prices and profits up?
contrary to popular belief, companies that announce layoffs do not enjoy higher stock prices than peers—either immediately or over time. A study of 141 layoff announcements between 1979 and 1997 found negative stock returns to companies announcing layoffs, with larger and permanent layoffs leading to greater negative effects. An examination of 1,445 downsizing announcements between 1990 and 1998 also reported that downsizing had a negative effect on stock-market returns, and the negative effects were larger the greater the extent of the downsizing. Yet another study comparing 300 layoff announcements in the United States and 73 in Japan found that in both countries, there were negative abnormal shareholder returns following the announcement.
How about productivity?
A study of productivity changes between 1977 and 1987 in more than 140,000 U.S. companies using Census of Manufacturers data found that companies that enjoyed the greatest increases in productivity were just as likely to have added workers as they were to have downsized.
And profits?
Even after statistically controlling for prior profitability, a study of 122 companies found that downsizing reduced subsequent profitability and that the negative consequences of downsizing were particularly evident in R&D-intensive industries and in companies that experienced growth in sales. Cascio’s study of firms in the S&P 500 found that companies that downsized remained less profitable than those that did not.
I wonder what you’d find if you dig into the details. For example, I can believe that layoffs don’t bring long-term stock price increases, but what about short-term increases? With a bit of Googling I found a a 2003 study that found that the timeframe is critical:
contrary to prior research, the market reacts positively to restructuring-related layoffs on the announcement date.
And, not surprisingly, one 1997 study showed that the stock market reacts differently if they think layoffs are a sign a company’s in serious trouble. And that makes me wonder if talking about the impact of layoffs on stock prices in general is meaningful.
But despite my this-is-too-good-to-be-true sense tingling, I also found a 2007 article by the New Yorker’s James Surowiecki — not Kumbaya kind of guy — that makes a similar argument. Here’s his take:
Over the past decade, many academics have looked at how layoffs affect stock prices, and they’ve found that the seven-per-cent rule is bunk. Instead of rising sharply, the stock of companies that trim their workforces is likely to fall. A recent meta-study that surveyed research from several countries, covering thousands of layoff announcements, concluded that, on average, markets had “a significantly negative” reaction to job cuts. Individual companies, of course, sometimes see stock prices jump after layoff news, but there’s no evidence that downsizing is a guaranteed hit with investors.This isn’t to say that Wall Street has gone soft—it still cares about profits, not people. But investors seem to understand that fewer people doesn’t always mean more profits.
I’m going to ask around to see if I can find somebody who’s got a good grasp on the lit, to see if the story’s more complicated or if I’ve just been suckered by what I read in the paper every day.
