Intra-Industry Effects of Layoff Announcements

Abstract

Using data on layoff announcements by S&P 500 firms, we show that layoff announcements mostly contain industry-wide news. Competitors' stock price reactions are positively correlated with the announcer's returns. This contagion effect is stronger for competitors whose values depend on growth opportunities. When layoff announcements induce positive stock returns to announcers, competitors with positive R&D see a 1.15% increase in their returns. Conversely, when announcements induce negative reactions to announcers, competitors with high sales growth see a reduction of 1.09% in returns. Our findings suggest that investors perceive layoffs as changes in growth options rather than changes in competitive environment.