| Abstract |
We propose a novel measure of layoff efficiency by comparing actual layoff size with the optimal level of hiring fitted by economic determinants prior to layoffs. Based on 749 layoff announcements over the period 2004 to 2012, hand-collected from corporate disclosures in Form 8-K, we find that layoff decisions in the US are on average inefficient. Specifically, an average layoff firm’s level of hiring already falls short of the optimal level of hiring even before the layoff so that the layoff further exacerbates the extent of the under-hiring from -1.5% to -11.9%, relative to its optimal level of hiring. This suggests that layoffs by American firms are on average a value- destroying managerial choice. Further, we find that both long-term operating performance and abnormal stock returns around layoff announcements increase with layoff efficiency, suggesting that the stock market understands the performance implication of layoff efficiency. In particular, the difference in the abnormal stock returns between the lowest and the highest layoff efficiency deciles is 2.8%, indicating that our results are economically significant. |