Research

We investigate the impact of mass layoff announcements on industry rivals and find that investors perceive layoff announcements as news about industry prospects. When a layoff announcement conveys good (bad) news for the announcer, rivals on average witness a 0.51% increase (0.65% decrease) in cumulative abnormal stock returns. To explain this industry effect, we test a 'growth opportunities' channel, where rivals with greater growth opportunities are affected most by changing industry prospects, and find that these firms experience the strongest contagion effect. Alternative industry classifications and a placebo test confirm that our results are not driven by confounding factors.

Do firms respond to labor mobility shocks? We construct an overlapping generations model where policies restricting labor mobility present firms with an important trade-off. Firms leverage their monopsony power to reduce late-career wages while early-career workers demand a wage premium to join the restricted sector. In response to higher labor turnover costs, firms alter their optimal capital-labor ratio. We confirm these predictions in the data by exploiting the statewide adoption by state supreme courts of the inevitable disclosure doctrine (IDD) as a valid legal doctrine intended to protect trade secrets by restricting labor mobility. Post-IDD, early-career workers receive higher starting wages, late-career workers experience slower wage growth, firms raise investment by 3.5 %, and their capital-labor ratio by 5.5 %. Our results suggest that firms respond meaningfully to labor mobility shocks by replacing labor with capital. 

Contrary to popular opinion, one-third of mass layoffs announced by S&P 500 firms do not result in downsizing, yet the market fails to identify this anomaly in the short-run. Therefore, I construct a real-time layoff index to predict the probability of downsizing following an announcement and show that an investment strategy, long in the bottom half of the index (Downsizing), generates an annual four-factor alpha of 6.96%. Downsizers create value in the long-run because they successfully reduce costs, increase liquidity, and improve performance. Importantly, Downsizers also ensure that managers commit to downsizing by raising additional debt prior to the announcement. 

Does learning from rival firms drive growth? Using a dataset of exogenous cybersecurity breaches, we find that firms learning from industry breaches experience significantly better growth prospects and enhanced operating performance. Two mechanisms explain this: an Incentive Channel and an Investment Channel. First, firms adapt CEO compensation structures to mitigate risk-taking while still incentivizing stock price maximization. Second, they invest in human capital, particularly in sales roles, to seize opportunities created by breaches. These findings reveal that leveraging a rival’s misfortune provides tangible value, highlighting the strategic importance of learning from competitors’ challenges.

Does credit rating quality affect corporate innovation? Using exogenous variation in rating quality that arises from competition among rating agencies, we show that firms with inflated ratings issue more patents, but their patent quality, as measured by scientific and economic value, declines. We provide evidence to show that managers engage in value-reducing patenting activity to exploit a compensation structure that rewards them for the number, but not the quality, of new patents. Our results are stronger in non-technology industries, which suggests that managers strategically exploit innovation when firms do not rely on patenting for value creation.