Have Employment Reductions Become Good News for Shareholders? The Effect of Job Loss Announcements on Stock Prices, 1970-97

Henry S. Farber and Kevin Hallock

No 7295, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the reaction of stock prices to announcements of reductions in force (RIFs) using a sample of nearly 3878 such announcements in 1176 large firms during the 1970-97 period collected from the Wall Street Journal Index. We note that, although there has been a dramatic secular increase in news stories related to job loss, the total number of actual announcements fro the firms in our sample follows the business cycle quite closely. We then examine changes over time in standard summary statistics (means, meridians, fraction negative) of the distribution of stock market reactions as well as changes over time in kernel density estimates of this distribution. We find clear evidence that the distribution of stock market reactions has shifted to the right (became less negative) over time. One possible explanation for this change is that, over the last three decades, RIFs designed to improve efficiency have become more common relative to RIFs designed to cope with reductions in product demand. We find that, although this explanation shows some promise, most of the decline in the negative stock price reaction remains unexplained.

JEL-codes: G14 J63 (search for similar items in EconPapers)
Date: 1999-08
New Economics Papers: this item is included in nep-fin, nep-lab and nep-ltv
Note: LS
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Citations: View citations in EconPapers (4)

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