Rival Growth Prospects & Equity Prices: Evidence from Mass Layoff Announcements (with Adam Bordeman & Roberto Pinheiro)
[Paper] - [Appendix] - [Online Appendix]
Journal of Money, Credit, and Banking 53(8), 1969-1997
We investigate the impact of mass layoff announcements on industry rivals and find that investors perceive layoff announcements as news about industry prospects. When a layoff announcement conveys good (bad) news for the announcer, rivals on average witness a 0.51% increase (0.65% decrease) in cumulative abnormal stock returns. To explain this industry effect, we test a 'growth opportunities' channel, where rivals with greater growth opportunities are affected most by changing industry prospects, and find that these firms experience the strongest contagion effect. Alternative industry classifications and a placebo test confirm that our results are not driven by confounding factors.
Inadequate human capital disclosure requirements have meant that we know little about the effects of long-term involuntary employee turnover on the firm. Contrary to popular belief, a third of mass layoffs announced by S&P 500 firms do not result in downsizing. As the market fails to identify this anomaly in the short-run, I construct a real-time layoff index to predict the probability of downsizing following an announcement. An investment strategy that is long in the bottom half of the index (Downsizing firms) generates an annual four-factor alpha of 6.96%. Downsizers benefit in the long-run when they successfully reduce costs, raise liquidity, and improve operating performance. I also find that Downsizers raise financial leverage prior to their layoff to simultaneously transfer the increased risk onto their workers and ensure that managers commit to downsizing. Overall, my results show that involuntary turnover triggered by layoff announcements have important implications for long-term performance. There is thus an urgent need for stricter requirements on human capital disclosure.
Does credit rating quality affect corporate innovation? Using exogenous variation in rating quality that arises from competition among rating agencies, we show that firms with inflated ratings issue more patents, but their patent quality, as measured by scientific and economic value, declines. We provide evidence to show that managers engage in value-reducing patenting activity to exploit a compensation structure that rewards them for the number, but not the quality, of new patents. Our results are stronger in non-technology industries, which suggests that managers strategically exploit innovation when firms do not rely on patenting for value creation.
Replacing Labor with Capital: Evidence from Aggregate Mobility Shocks (with Roberto Pinheiro and Harry Turtle)
In an overlapping generations model, we show that policies restricting labor mobility present firms with an important trade-off. On the one hand, firms use monopsony power over their current employees to exert downward wage pressure on late-career workers. On the other hand, early career workers demand a wage premium to join the restricted sector. Subsequently, firms increase capital expenditures to shift away from expensive labor, and thereby alter their optimal capital-labor ratio. Empirically, we confirm this finding by exploiting the statewide adoption of the inevitable disclosure doctrine (IDD), a law intended to protect trade secrets. Following an IDD adoption, local firms increase capital expenditures by 3.5% and the capital-labor ratio increases by 5.5%. This result is amplified for firms with greater human capital intensity. Finally, contrary to intent, we do not find that IDD adoptions spur investment in either R&D or growth options.
Work in progress
Learning from Peers: Cyber security Breaches, Tone and Corporate Policy (with Costanza Meneghetti & Sam Piotrowski)
Minimum wage and the Housing Market (with Hilla Skiba)
Mutual Fund Flows, Active Management, & Market Performance (with Roberto Pinheiro & Hilla Skiba)