Do Layoffs Affect A Company’s Stock Market Performance?

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Companies are laying off multiple employees to minimize company expenses during times of high inflation. Google did one of the biggest layoffs in the tech industry by letting go as many as 12,000 employees in January 2023. In the same period, Microsoft laid off about 10,000 employees, while Salesforce and Amazon each let go of 8,000 workers.

While layoffs are supposed to help budget, these moves can actually lead to significant consequences with regards to their stock market performance.
 

The Connection Between Layoffs and Market Performance

Many companies resort to layoffs because they believe that it could signal a move towards greater efficiency and better financial performance. Unfortunately, this decision actually sends the opposite message to investors.

InvestorPlace cites that a study made by Wayne F. Cascio on downsizing shows that companies that reduce headcounts without making other changes rarely achieve the long-term success that they aim for. In contrast, companies with more stable market performance are more likely to conduct various strategies that can help retain their talents. As such, some investors view layoffs as an indicator of a company’s instability as an investment.

On top of that, InvestorPlace cites that a Newsweek report shows that larger and permanent layoffs have led to worse stock performances, based on historical data. Over a span of two decades, the report was able to track those companies that announce layoffs were more likely to report negative stock returns as a result. In fact, about 300 companies in the US and in Japan served as proof that the shares of organizations tend to fall after they announce layoffs for their workforce.
 

How Companies Can Protect Their Stock Market Performance

As Cascio previously stated, stable companies should do everything that they can to retain their talents. While layoffs may seem like the most appropriate choice to some, there are plenty of options that organizations should consider first.

To start, companies can opt for furloughs or temporary layoffs to reduce costs during a recession and easily bring back competent talents after recovering. Companies can also cut expenses and still keep their people by offering part-time options for team members. Through these adjustments, companies can maintain their workforce and appease investors while also optimizing their budgets.

If layoffs are necessary for the company, it’s important to provide competent outplacement services for the staff. Organizations must provide a human approach to outplacement by offering individualized support and effective job placement strategies to employees. To illustrate, companies can help laid-off employees improve their professional branding and increase their network to significantly reduce their time to placement.

Though these outplacement strategies may seem like too much, their human approach can actually attract investors that are concerned about ESG. A poll conducted by Just Capital highlights that a company’s treatment of employees is the most critical ESG issue for the American public, making it crucial for companies to treat their employees well even way after they’re laid off. By properly evaluating their outplacement strategy, organizations can demonstrate their commitment to their ESG efforts and strengthen their branding among investors.

Layoffs are just one of the many factors that investors should consider before betting on a company. These layoffs can serve as an insight into a company's ESG efforts and overall efficiency, which is why it can significantly impact its stock market performance.