Do Layoffs and Plant Closings Effect Manufacturers’ Market Value?
The post-COVID economy is characterized by emerging technology as both an opportunity and a threat. Companies are scrambling to recalibrate their operations to improve financial performance.
Just as COVID upended business plans in 2020, the post-COVID economy is characterized by emerging and disruptive technology as both an opportunity and a threat. Companies are scrambling to “recalibrate their headcounts and tighten their belts amid concerns about a slowing economy.” For industrial companies, layoffs are not the only way to rein in costs; closing a manufacturing facility is also an option in hopes of improving financial results. In this initial post in our Canvas series, we will take a look at how industrial companies are adapting to the post-COVID economy and what that may mean for firm value.
Recent Layoff Headlines
Over the last few weeks, it’s been hard to ignore the news headlines as companies report their latest quarterly financials. I’ve aggregated a few headlines from the Wall Street Journal and captured the number of employees affected below:
(+10,000) Boeing Plans to Hire 10,000 Employees in 2023, which “will be focused on its engineering and manufacturing operations, with some potential job cuts in non-factory staff.”
(-2,000) Boeing to Cut 2,000 Finance and HR Jobs(-2,000) Dow to Cut 2,000 Jobs Globally, seeks to cut costs by $1 billion in 2023
(-850) Rivian to Lay Off 6% of Workforce in EV Maker’s Second Round of Job Cuts
PepsiCo to Lay Off Hundreds of Workers in Headquarters Roles
A quick summary of these reports is that these large companies are trimming back office staff and largely leaving production workers unaffected. But it’s not only multinational manufacturers that have been affected. Many well-known manufacturing technology companies and technology providers such as SAP, IBM, Britishvolt, and Desktop Metal have also been impacted by layoffs. The latter two companies did not make it into the Wall Street Journal.
Will Layoffs Improve Financial Results and Increase a Firm's Value?
In 2021, Ryan Atkins and Charles Favreau at Duquesne University sought to answer this question. Their paper, “The effects of layoffs and plant closings on manufacturers’ market value” published in the International Journal of Production Economics suggests stock performance indifference to their benchmarks for manufacturers that solely perform layoffs.
Using a sample of 574 downsizing events identified through Worker Adjustment and Retraining Notification (WARN) notices and Wall Street Journal articles, we extend the observation window to a year following the layoff event. As the first study to use this richer dataset for studying stock returns, we document a positive relationship between stock returns and closing a plant during a layoff. The stock prices of the firms in the study that closed plants outperformed comparable firms by 7.9% in the year following the event. In contrast, the returns for firms with just a layoff were indifferent from their benchmarks. Contrary to prior work in this area, we are the first to document a positive relationship between the number of employees affected by the event and stock returns over the following year. In sum, our work documents the importance of including WARN notices when studying downsizing events to address the size bias associated with using media sources alone.
Ryan and Charles studied both Wall Street Journal articles and Worker Adjustment and Retraining Notification (WARN) notices. Next week, we will pull together the WARN notice data to uncover any plant closures that could be missed by scanning the headlines alone.