[Paper] - [Appendix] - [Online Appendix]

Forthcoming at Journal of Money, Credit and Banking

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.

Working Papers

  • Strategic Leverage and the Upside to Downsizing

[PDF] - [SSRN]

Currently under review

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.

  • Agency Costs in Corporate Innovation: Evidence from Inflated Ratings (with Sean Flynn)

Available upon request

We exploit plausibly exogenous variation in ratings quality that comes from increased competition among rating agencies to study how inflated ratings affect innovation. We find that while firms with inflated ratings issue a greater number of patents, the economic value of innovation ($ value of patents), the scientific value of innovation (forward citations), and, the firm's growth prospects (Q and R&D) drop significantly. To explain this result, we uncover a new `agency cost' channel that rewards managers with salary hikes following new patenting activity. These results are magnified for non-technology firms suggesting that managers are more likely to issue value-destroying patents when their firms don't rely on patenting innovation for value creation. Our findings are consistent with the idea that managers recognize the true value of the firm and that inflated ratings encourage wasteful expenditure while discouraging long term investment in innovation.

Available upon request

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.

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)