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.
Leverage, Mispricing, and the Upside to Downsizing
Contrary to popular belief, nearly a third of mass layoffs announced by S&P 500 firms do not result in downsizing. Since 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 layoff index (Downsizing firms) generates an annual four-factor alpha of 6.96 %. Downsizing firms benefit in the long run because they successfully reduce production costs and improve operating performance. To show that some firms recognize this benefit, I identify a 'strategic debt' channel in which firms use poor performance to lever up and commit to downsizing prior to their layoff. Finally, I show that my results are robust to alternative measures of long run performance, multiple matching methodologies and placebo tests.
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.
The inevitable disclosure doctrine (IDD) is intended to help firms protect their trade secrets from rivals by restricting labor mobility. We document an unintended consequence of state recognition of the IDD that results in a capital for labor substitution. IDD adoption increases the relative cost of high-skilled labor and triggers a replacement of labor by capital. Firms finance this replacement with additional leverage made possible by the reduced fixed costs of skilled labor. Our findings suggest that, contrary to intent, the IDD incentivizes a shift toward capital and away from more costly skilled labor.