Layoffs, corporate governance characteristics and stockholder wealth

Abstract

Global economic events, such as recent years’ global financial crisis, the transfer of production to low-cost countries and the sanctions between Russia and the European Union, have affected operating conditions of the Finnish companies. In order to cope with changed economic situations, layoffs have become a common strategical practice. In addition, after the public awareness of some remarkable corporate scandals, there has been a noticeable increased awareness towards corporate governance issues and regulation. The purpose of the study is to determine whether the stock market reactions to layoff announcements are affected by the Finnish companies’ different governance practices. In addition, the purpose is to examine the general effect of layoffs on stockholder wealth in Finland, and compare whether the reason of a layoff affect the stock market reaction.

The agency problems between management and owners arise when managerial activities fail to align with the shareholders’ interests. In order to minimize the agency problems, different corporate governance rules and practices are established to firms. Governance practices have been documented in some strategic concepts to eliminate conflicts of interest and increase shareholder value. Moreover, previous studies have documented that layoff announcements generate negative abnormal stock returns but on the other hand, several prior studies have documented less negative abnormal returns to the layoff announcements, which are due to efficiency -related reasons. In this study, the event study- methodology and the OLS regression analysis are utilized. The data sample consists of 204 layoff announcements of Finnish publicly listed firms in the time period of 2007–2015.

The general effect of layoff announcements on stockholder wealth is found to be negative around the estimation window studied. In addition, there is a positive relationship between cumulative average abnormal returns and layoffs, which are due to efficiency and restructuring reasons rather than results of a declining demand and financial distress. Moreover, a statistically significant positive relationship between cumulative abnormal stock returns and board gender diversity is found, which might indicate that gender diversity will enhance the board effectiveness and the monitoring of shareholder’s interests. Other corporate governance characteristics examined in this study are found to be statistically insignificant.