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Corporate Layoffs and Accounting Conservatism

We propose a novel measure of layoff efficiency which compares actual layoff size with the abnormal level of hiring prior to layoff announcements. Based on 749 layoff announcements hand-collected from corporate disclosures in Form 8-K over the period 2004 to 2012, we find that layoff decisions in the U.S. are on average inefficient. Specifically, an average layoff firm’s level of hiring already falls short of the optimal level of hiring (i.e., under-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. We further find that abnormal stock returns surrounding layoff announcements increase with layoff efficiency, suggesting that the stock market understands the performance implication of layoff efficiency. The difference in the abnormal stock returns between the lowest and the highest layoff efficiency deciles is 2.8% and economically significant.