The Efficiency and Productivity Implications of Corporate Layoffs

This paper examines the impact of corporate layoffs on firm efficiency levels. The methodology used provides fresh insights into the effects of layoffs on firm and labour-force performance. This paper uses a data envelopment analysis (DEA) approach to provide a benchmark measure for the operating efficiency of restructured companies that have reduced staff numbers and also companies that have found it necessary to downsize due to declining demand for its product. We apply this linear programming technique to both pre- and post-layoff periods. The findings indicate the sample of companies that restructure and incorporate layoffs as part of the process find an increase in efficiency while the opposite is found for firms that find it necessary to cut staff due to declining performance. The study also examines the relation between layoffs and shareholder wealth. The findings show that layoffs attributed to declining demand are related with poor stock market performance in the long-term post-layoff period. The evidence also suggests that firms involved in reorganisation, and subsequently layoffs, perform strongly and are viewed positively by the market over the 2-year post-layoff period.