Strategic Corporate Layoffs

Author/Editor: Ruchir Agarwal ; Julian Kolev
Publication Date: December 28, 2016
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: Firms in the S&P 500 often announce layoffs within days of one another, despite the fact that the average S&P 500 constituent announces layoffs once every 5 years. By contrast, similarsized privately-held firms do not behave in this way. This paper provides empirical evidence that such clustering behavior is largely due to CEOs managing their reputation in financial markets. To interpret these results we develop a theoretical framework in which managers delay layoffs during good economic states to avoid damaging the markets perception of their ability. The model predicts clustering in the timing of layoff announcements, and illustrates a mechanism through which the cyclicality of firms layoff policies is amplified. Our findings suggest that reputation management is an important driver of layoff policies both at daily frequencies and over the business cycle, and can have significant macroeconomic consequences.
Series: Working Paper No. 16/255
Subject(s): Public corporations | Industry | Banks | Employment policy | Business cycles | Stock markets

Publication Date: December 28, 2016
ISBN/ISSN: 9781475563924/1018-5941 Format: Paper
Stock No: WPIEA2016255 Pages: 77
US$18.00 (Academic Rate:
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