Employee layoffs, shareholder wealth and firm performance: Evidence from the UK
Journal of Business Finance and Accounting
Leeds University Business School, University of Leeds, United Kingdom; Department of Accounting and Finance, University of Strathclyde, United Kingdom; Faculty of Business Management, Open University of Tanzania, Tanzania; Department of Accounting and Finance, University of Strathclyde, Curran Building, 100 Cathedral Street, Glasgow G4 0LN, United Kingdom
We examine the financial performance of UK listed companies surrounding the announcement of permanent employee layoffs. We find that poor operating and stock price performance, increased gearing, and threats from external markets for corporate control precede employee layoffs. Layoff announcements elicit a significantly negative stock price reaction, which is driven by announcements that are reactive to poor financial conditions. We also find that layoffs result in significant increases in employee productivity and corporate focus. We conclude that layoffs represent an efficient response to poor financial conditions, but that their occurrence is strongly dependent on pressure from external control markets. © 2007 Blackwell Publishing Ltd.