[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.

Working Papers

  • Leverage, Mispricing, and the Upside to Downsizing

[PDF] - [SSRN]

Being revised

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.

  • Credit Rating Inflation and Corporate Innovation (with Sean Flynn)

[PDF] - [SSRN]
Being revised

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.

Coming soon!

We model an environment with overlapping generations of labor to show that policies restricting labor mobility increase a firm's monopsony power and labor turnover costs. Subsequently, firms increase capital expenditure, altering their optimal capital-labor ratio. We confirm this by exploiting the statewide adoption of the inevitable disclosure doctrine (IDD), a law intended to protect trade secrets by restricting labor mobility. Following an IDD adoption, local firms increase capital expenditure (capital-labor ratio) by 3.5 % (5.5 %). This result is magnified for firms with greater human capital intensity. Finally, IDD adoptions do not spur investment in either R&D or growth options as intended.

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)