<p class="MsoNormal" style="text-align: justify; margin: 0in 37.8pt 0pt 0.5in;"><span style="mso-bidi-font-style: italic;"><span style="font-size: x-small;"><span style="font-family: Batang;">Prior research has presented two conflicting hypotheses regarding the effect of a firm's financial condition on the market reaction to announcements of company layoffs.<span style="mso-spacerun: yes;">&nbsp; </span>The "financial distress" hypothesis states that the market reaction to layoffs for financially weak firms will be more <strong style="mso-bidi-font-weight: normal;">n<span style="color: black;">egative</span></strong> than for financially healthy firms, because the layoff announcement reveals and/or confirms the problems that led to the layoff.<span style="mso-spacerun: yes;">&nbsp; </span>On the other hand, the "potential benefit" hypothesis states that the market reaction for financially weak firms will be more <strong style="mso-bidi-font-weight: normal;"><span style="color: black;">positive</span></strong> than for financially healthy firms, because the financially weak firms have a greater potential to benefit from the layoff. Two prior studies, Iqbal and Shetty (1995) and Worrell, Davidson, and Sharma (1991), examine stock price reactions to announcements of company layoffs and how those reactions are related to the financial condition of the firm at the time of the layoff.<span style="mso-spacerun: yes;">&nbsp; </span>They reach different conclusions, however, as to the effect of financial condition.<span style="mso-spacerun: yes;">&nbsp; </span>Iqbal and Shetty find evidence supporting the potential benefit hypothesis, whereas WDS find evidence supporting the financial distress hypothesis.</span></span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 37.8pt 0pt 0.5in;"><span style="mso-bidi-font-style: italic;"><span style="font-family: Batang; font-size: x-small;">&nbsp;</span></span></p><p class="MsoNormal" style="text-align: justify; margin: 0in 37.8pt 0pt 0.5in;"><span style="mso-bidi-font-style: italic;"><span style="font-size: x-small;"><span style="font-family: Batang;">The current study offers an alternative hypothesis for the effect of a firm's financial condition on the market reaction to layoffs.<span style="mso-spacerun: yes;">&nbsp; </span>Instead of concluding that the financial distress and potential benefit hypotheses are mutually exclusive and competing, this study provides&nbsp;evidence that these hypotheses&nbsp;simultaneously explain<span style="color: black;"> concurrent</span> and <span style="color: black;">additive</span> effects on the stock price reactions to layoff announcements.<span style="mso-spacerun: yes;">&nbsp; </span>These results have implications both for investors and management regarding the market's reaction to announcements of employee layoffs.</span></span></span></p>