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Reactions of the stock market to corporate layoffs

February 17, 2022

How the capital market assesses the legitimacy of management decisions

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Fotocredit: © Adeolu Eletu on

How do stock markets react to announcements of mass layoffs? Positively? Negatively? So far, research has provided different results on this issue. The current publication by FH Prof. Dr. Ann-Christine Schulz (Institute for Digital Transformation & Strategy at FHWien der WKW) and her co-author Alexander Himme (Kuehne Logistics University Hamburg) provides an answer to this question and explains the different results.

The article, published in the internationally renowned journal Socio-Economic Review, examines the role of investors in the institutionalization of downsizing measures (mass layoffs). Various past research has shown that mass layoffs have negative consequences for a company’s stock performance. However, the current study shows that the effects are time-dependent and related to the popularity and prevalence of such measures in corporate practice.

According to the study, during the period from 1990 to 2006, common downsizing practices were increasingly legitimate for investors and stock market returns were more positive on average. However, both shareholder value orientation and refocusing were current trends during this period. It is possible that this more positive perception of mass layoffs in the capital market contributed to the spread of this management concept.

Thus, the study results help explain why downsizing methods have been widespread in recent decades, despite their negative effects on the business environment (e.g., loss of reputation and motivation).

The full paper by Ann-Christine Schulz and Alexander Himme was published in the journal Socio-Economic Review and can be accessed here.