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On the estimation of stock‐market reaction to corporate layoff announcements

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  • TeWhan Hahn
  • Mario G. Reyes

Abstract

This study investigates the stock‐market reaction to layoff announcements where more than 1000 workers are affected. We employ a dummy variable regression (DVR) version of the market model and compare the results obtained using ordinary least squares (OLS) versus exponential GARCH (EGARCH), and value‐weighted (VW) versus equally weighted (EW) market index. We find that the stock market responds negatively to layoffs attributed to low demand. We also find that contrary to prior research, the market reacts positively to restructuring‐related layoffs on the announcement date. This pattern of market reaction is observed regardless of the market index used or the parameter estimation methods employed, although the empirical results indicate that using EGARCH/VW market index tends to generate fewer statistically significant test results and smaller (in the absolute size of the cumulative) abnormal returns (ARs). Taken together, our study provides additional support for the claim that studies of stock‐market reaction to corporate events must account for the time variation in return volatility. Ignoring these could result in erroneous inferences.

Suggested Citation

  • TeWhan Hahn & Mario G. Reyes, 2004. "On the estimation of stock‐market reaction to corporate layoff announcements," Review of Financial Economics, John Wiley & Sons, vol. 13(4), pages 357-370.
    • Handle: RePEc:wly:revfec:v:13:y:2004:i:4:p:357-370
    DOI: 10.1016/j.rfe.2003.12.004
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    References listed on IDEAS

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    Cited by:

    1. Atkins, Ryan & Favreau, Charles, 2022. "The effects of layoffs and plant closings on manufacturers’ market value," International Journal of Production Economics, Elsevier, vol. 245(C).

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