Mo' Layoffs Mo' Problems
Wall Street does not reward "downsizing" as automatically as once thought, according to a summary of several studies on the Financial Page of this week's New Yorker. This negates the oft-cited "seven-per-cent rule" - or that a company's stock price jumps 7% after a major layoff announcement. The recent examples in the Cities of Group and Circuit have followed this trend, with share prices staying flat or dipping since each major layoff announcements. From The New Yorker:
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.
The article contends that the seven-per-cent rule is more a product of media coverage on downsizing success stories, which are big news, while the scores of companies that stagnate following layoffs get little to no coverage. When the status quo is performance that results in major layoffs, it's hardly news when a company maintains it.
The other insight is that even "successful" cost-reducing layoffs don't often increase the value of a company, which suggests that the Street is smarter than public perception, and values a workforce in more than just the cost line of a P&L.
It’s the Workforce, Stupid! - [New Yorker]
