Ceo Equity Portfolio Incentives and Layoff Decisions

Abstract

CEOs with higher equity-based compensation are widely believed to be more likely to act in shareholders' interests. Unlike less common acquisitions, voluntary liquidations, or seasoned equity offerings, layoffs are comparatively common elements of firms' operating strategies. We find that CEOs with at least one year of tenure who possess greater incentives from portfolios of restricted stock and stock option grants are more likely to announce layoffs, and that these layoffs create shareholder value. We conclude that accumulated portfolios of restricted stock and stock option grants encourage CEOs to adopt operating strategies that improve operating profits and stock performance. 2007 The Southern Finance Association and the Southwestern Finance Association.

Why Do Stock Prices Decline in Response to Employee Layoffs? Uk Evidence From the 2008 Global Financial Crisis

“…An increase in layoffs explained by economic conditions is expected as a consequence of stock market conditions following the 2008 financial crisis. Indeed, a similar increase in layoffs occurred during the U.S. bear market of 2001–2002, as reported in Brookman, Chang, and Rennie (2007b). However, the difference between the two subsamples highlights the magnitude of the financial crisis and its impact on layoffs.…”

“…The more negative response to layoffs in 2008 occurs irrespective of the reasons provided by management, suggesting that information for firm‐level investment opportunities contained in financial market conditions dominates managerial justifications in explaining how investors perceive employee layoff announcements. In this regard, our research both complements and extends the earlier analysis of Brookman, Chang, and Rennie (2007b) and Farber and Hallock (2009) in formally investigating the importance of future economic prospects in explaining the stock price response to employee layoff announcements.…”

“…The declining investment opportunities hypothesis suggests that a layoff firm's operations are less profitable than previously believed, leading to a downward revision in the market value of both the discontinued operations and the remaining assets of the business. Supporting this contention, Brickley and Van Drunen (1990), Worrell, Davidson, and Sharma (1991), and Brookman, Chang, and Rennie (2007b) find the stock price reaction to layoffs is negative when the justification is attributed to declining demand for the firm's goods and services.…”

“…Their sample covers U.S. firms from 1993 to 1999, which they note was a period of economic prosperity, and they suggest this as a potential explanation for their empirical finding. Brookman, Chang, and Rennie (2007b) report that inclusion of a recessionary period in 2001–2002 reduces the positive market response to layoff announcements found during their earlier period. However, given their focus on the link between executive compensation and layoff choice, their empirical approach is not designed to formally consider whether the market reaction to layoff announcements is period dependent.…”

CEO Compensation

“…More recent studies shift their focus to managers' stock and option holdings. Equity incentives have been connected to a wide variety of outcomes, including better operating performance (Core & Larcker 2002), more and better acquisitions (Datta et al 2001, Cai & Vijh 2007, larger restructurings and layoffs (Dial & Murphy 1995, Brookman et al 2007, and more voluntary liquidations (Mehran et al 1998). Executive stock options, which are usually not dividend protected, have also been linked to lower dividends (Lambert et al 1989) and to a shift from dividends to share repurchases (Fenn & Liang 2001).…”