The layoffs are increasing

Stock market reactionThe announcement of layoffs often causes the share price to fall

If a company announces the layoff of employees, it can certainly drive the stock market price upwards - at least according to popular belief. And there are definitely cases in which the announcement of layoffs was accompanied by significant price increases. But is that really always the case? Prof. Werner Neus and Dr. Andreas Walter from the Chair of Banking Management at the University of Tübingen's Department of Economics have presented a first large-scale study for Germany that examines which course reactions are triggered by the announcement of job cuts. They examined all 265 cases of German companies listed on the Frankfurt Stock Exchange that published dismissal plans between January 1995 and December 2006.

A prominent example of price increases due to the announcement of layoffs is Deutsche Bank, which at its annual press conference on February 3, 2005 announced a record profit for 2004, a layoff plan for 6,000 employees and a target of 25 percent for the return on equity. On that day, the price of the Deutsche Bank share rose by around 2.5 percent, while the Dax lost 0.3 percent. However, you can also Counterexamples find: For example, the car manufacturer BMW, which on February 6, 2008 announced an austerity program with 8,000 planned job cuts; On the same day, the price of the BMW share fell by about 2.8 percent, while the Dax rose by 1.2 percent.

The examples make it clear that no regularities can be inferred from individual cases. The results of the study by the Tübingen researchers after examining the share price development when announcing layoffs provide more clarity: it turned out that the companies concerned lag behind the share price development of all listed companies by a significant 0.37 percent on the day the layoffs were announced. (This corresponds to a year-on-year loss in value of 54 percent relative to an average listed company.) This overall result is in line with the results available for other national capital markets.

Closer investigation shows that the stock market reaction is heavily influenced by the Motives for the discharge plans depends. Basically, two groups of motifs can be distinguished:

  • on the one hand, the reaction to a company crisis, in particular a significant drop in demand,
  • on the other hand, the effort to actively use the downsizing as an instrument to increase profits.

Unsurprisingly, it turns out that in the event of a reaction to a crisis, the negative market return is even sharper: Here, the companies concerned lag behind the market by a significant 0.76 percent.

In contrast, the scientists also consider it surprising that even with the stated goal of increasing the profit of a company no positive market reaction follows the announcement of layoffs (insignificant 0.03 percent). It can therefore be said that the assumption that is repeatedly put forward that announcements of dismissals lead to price increases on the stock market is only true in individual cases. In general, however, the price falls relative to the overall market. Even with the declared motive of increasing profits, the stock exchange does not take dismissal announcements positively.

[po; Source: idw; Image: Fotolia.com]