Rival Growth Prospects and Equity Prices: Evidence from Mass Layoff Announcements

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.