The effects of layoffs and plant closings on manufacturers’ market value

Abstract

Publicly traded companies downsize via plant closings and layoffs to reduce expenses, improve financial results, and ultimately increase the firm's value. Quite often, however, the stock market reaction is neutral, or even negative, to news of downsizing. Although this result has been shown in many prior studies, these studies fail to observe stock market returns beyond ten days after the news event. Furthermore, they tend to rely on national news outlets, which are biased towards larger companies. Using a sample of 574 downsizing events identified through Worker Adjustment and Retraining Notification (WARN) notices and Wall Street Journal articles, we extend the observation window to a year following the layoff event. As the first study to use this richer dataset for studying stock returns, we document a positive relationship between stock returns and closing a plant during a layoff. The stock prices of the firms in the study that closed plants outperformed comparable firms by 7.9% in the year following the event. In contrast, the returns for firms with just a layoff were indifferent from their benchmarks. Contrary to prior work in this area, we are the first to document a positive relationship between the number of employees affected by the event and stock returns over the following year. In sum, our work documents the importance of including WARN notices when studying downsizing events to address the size bias associated with using media sources alone.