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

• Published in: Review of financial economics 2004, Vol.13 (4), p.357-370
• Main Authors: Hahn, TeWhan, Reyes, Mario G.
• Format: Article
• Language: English
• Subjects: Dummy variable regression; Economic theory; EGARCH; G14; G34; Layoffs; Parameter estimation; Regression analysis; Stock exchanges; Stock prices; Studies; Time-varying volatility
• ISSN: 1058-3300; 1873-5924
• DOI: 10.1016/j.rfe.2003.12.004

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.