Layoff announcements: Stock market impact and financial performance

Layoff decisions induced by unexpected adverse market conditions should be associated with declines in profitability measures and firm values, while unexpected layoff decisions resulting from improved efficiency should be associated with improved profitability measures and higher firm values. We demonstrate that future performance measures are associated with the reasons cited by management in layoff announcements, and that investors consider these reasons as credible signals of future performance. This implies that investors consider layoffs an effective cost-reduction tool that enhances firm value, but they deem that layoff decisions which are induced by adverse market conditions connote negative information.