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Understanding Competitive and Contagion Effects of Layoff Announcements

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Abstract

When a firm announces a significant permanent layoff, the firm's reputation among key stakeholders such as employees and investors suffers. However, what does this action mean for rival firms? How does the information contained in a layoff announcement by one firm transfer to the reputations of other firms in the industry? Building on the similarity between the reputation formation process and the firm valuation process, we use stock price as an aggregate measure of firm reputation in the eyes of shareholders. We examine how changes in the announcing firm's reputation affect the reputations of rival firms, through changes in their stock prices, in the same (contagion effect) or opposite (competitive effect) direction. This paper examines a longitudinal sample of layoff announcements in the US oil and gas industry from 1989 to 1996. Results suggest that reputation effects of layoff announcements spillover beyond the announcing firm and extend to other firms in the industry. These inter-organizational reputation effects follow a contagious process, that is, if shareholders respond negatively to a layoff announcement, they will exhibit simultaneous negative reactions for non-announcing firms and that the negative effects of layoff announcements increase with layoff prevalence. Furthermore, we find that close rivals experience a dampening of the contagion effect, perhaps reflecting countervailing competitive effects. By examining layoff announcements through both the institutional reputation and resource-based lenses, our work begins to reconcile how the two competing forces of cooperation and competition work together to influence firm-level outcomes.

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Notes

  1. More recent events, such as OPEC production cuts, the 9/11/2001 attacks and the Iraq war have caused oil prices to rise to levels experienced in the early 1980s, further underscoring the uniqueness of the sample time-frame for this industry.

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Acknowledgements

A preliminary version of this paper was presented at the Academy of Management Meeting in Atlanta, GA. This paper stems data originally collected for Sheila Goins' dissertation. She acknowledges the assistance of Thomas D'Aunno, Mark Zbaracki, Jesper Sorensen, Ron Burt and Damon Phillips for guidance with the initial data collection and project design. We also thank three anonymous reviews for their constructive suggestions and challenging questions.

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  1. University of Iowa, Iowa City, IA, USA

    Sheila Goins

  2. University of Iowa, Iowa City, IA, USA

    Thomas S Gruca

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  1. Sheila Goins
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Goins, S., Gruca, T. Understanding Competitive and Contagion Effects of Layoff Announcements. Corp Reputation Rev 11, 12–34 (2008). https://doi.org/10.1057/crr.2008.3

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