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

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Author Info
Henry S. Farber
Kevin F. Hallock

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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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7295.

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Date of creation: Aug 1999
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Handle: RePEc:nbr:nberwo:7295

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Find related papers by JEL classification:
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
J63 - Labor and Demographic Economics - - Mobility, Unemployment, and Vacancies - - - Turnover; Vacancies; Layoffs

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  1. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March. [Downloadable!] (restricted)
  2. John M. Abowd & George T. Milkovich & John M. Hannon, 1990. "The effects of human resource management decisions on shareholder value," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 43(3), pages 203-236, February.
  3. Hallock, Kevin F, 1998. "Layoffs, Top Executive Pay, and Firm Performance," American Economic Review, American Economic Association, vol. 88(4), pages 711-23, September. [Downloadable!] (restricted)
  4. A. Craig MacKinlay, 1997. "Event Studies in Economics and Finance," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 13-39, March. [Downloadable!] (restricted)
  5. Blackwell, David W. & Marr, M. Wayne & Spivey, Michael F., 1990. "Plant-closing decisions and the market value of the firm," Journal of Financial Economics, Elsevier, vol. 26(2), pages 277-288, August. [Downloadable!] (restricted)
  6. Fama, Eugene F, et al, 1969. "The Adjustment of Stock Prices to New Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 10(1), pages 1-21, February. [Downloadable!] (restricted)
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