From George Anders' "Business" column today:
When companies do announce big job cuts, executives often hope investors will applaud. That's because the company is trying to become leaner and more cost-competitive, even if the move means taking severance charges and enduring short-term reputational damage from mass dismissals.
But the notion of a layoff-inspired leap in a company's stock price is usually a mirage, according to a yet-to-be published study by Gunther Capelle-Blancard, a professor at the University of Paris, Pantheon-Sorbonne, and Nicolas Couderc, a researcher at the same university.
On average, the two academics say, share prices of companies announcing layoffs do about 1.2% worse than market benchmarks in the three trading sessions after news of the job cuts is disseminated. Companies fare even worse -- a 2.2% drop -- if the job cuts are defensive and simply reflect a business downturn. They fare a bit better -- but still lose ground -- if the layoffs are part of a broader retooling of the business without obvious economic pressures.
Their study is a "meta-analysis" that combines the results of 40 published studies looking at stock performance in specific countries during periods from 1990 to 2006. Mr. Capelle-Blancard says he was surprised that the data show investors almost universally view layoffs as bad news, regardless of whether the focus was on the U.S., Europe or other markets.
A myth has grown up, perhaps inspired by the example of International Business Machines in the mid-1990s, that big job cuts can jolt a slow-moving older company into a renaissance of growth. That did work for IBM, under its charismatic CEO at the time, Louis V. Gerstner Jr.
But IBM's turnaround increasingly looks like a rare, once-in-a-generation comeback that defied the odds. Companies slashing payrolls these days can consider themselves fortunate if they merely stop the erosion in their prospects.
'Nuff said.
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