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Recently, CU Denver Business School Professor of Management Wayne Cascio’s research was featured in The New York Times. In an article about layoffs, Cascio discussed the results of his study that confirmed companies that are quick to lay off employees see diminished financial performance. The study, co-authored with Finance Professor Rohan Christie-David and Finance Professor Arjun Chatrath from Portland State University, will be published later this year in the Academy of Management Journal.

Understanding the Study

For three years, the research team examined 43,000 companies on the New York Stock Exchange (NYSE) and made more than 360,000 observations through a 37-year period (1980-2016), They discovered that when a company restructures (downsizes or upsizes), it can do it in three ways: employees, assets, or both (also called combination restructuring). According to the results of the study, the most crucial factor that affected how a company behaved was how it was doing financially. To investigate this, the researchers examined company earnings data from two years before it upsized or downsized, and the financial results in industry-adjusted total shareholder returns up to two years after the restructuring.

The study investigated six factors that forecast whether or not a company may restructure:

1. Company performance. “Companies that are doing relatively well tend to upsize and companies that are performing poorly tend to downsize,” said Professor Cascio. If a company is in the red, first it downsizes employees, then assets, then a combination of both. When it is doing well, it tends to upsize in the same order.
2. Managerial foresight. Managers in companies make strategic decisions on how to proceed. They look at dividends increasing or decreasing, which could lead to deciding to decrease or increase employees, assets, or both.
3. The economy. In a downturn, companies often turn to downsizing, even if they shouldn’t.
4. Political uncertainty. When this is high, companies might decide to downsize because there is more risk involved that they wish to mitigate.
5. Industry. What industry is the business in? The study compared banks to banks, energy companies to energy companies, etc. One industry could be up while the other is down, so sorting things by industry allowed the researchers to compare company performance within its industry and keep things controlled.
6. Technology. The study’s data began in 1980, and technology has evolved hugely since. This helps forecast whether a company will increase/decrease assets too.

What a company does in the prior two years affects what will happen in the next two. This may seem intuitive, but companies often take preemptive action before they should. That is the most significant finding of this study.

Companies that downsize when performance isn’t bad don’t do as well two years later.

The more “pain” a company tolerates through pay/hour cuts, furloughs, and other cuts before taking drastic steps, the more likely it is to do better two years later than a company that starts cutting right away or “proactively downsizing.” This is why during this COVID-19 pandemic and other economic downturns, you see some companies attempting to do everything they can before laying people off.

As The New York Times article stated: “The companies that delayed layoffs as long as they could — whether by cutting salaries, furloughing employees, or even running in the red — saw higher stock returns, two years later, than comparable companies that fired people from the start. Businesses currently mulling layoffs should remember this.”

Implications and Advice for Business Students

This study has significant implications for students, especially those entering the job market. For those who are seeking employment right now, Cascio recommends looking into companies and their histories around layoffs and performance. This can help you predict whether or not you might keep your job in years to come if trouble continues.

“My best advice is to do research before you accept a job to see if the company has laid off employees in the past. If you can find one that hasn’t, it’s unlikely they will start now,” said Cascio. Look carefully into the history of any company you would like to join. If they have done multiple years of layoffs, they will likely do it again. The best companies generally have few to no layoffs.

People want to work at companies where they are treated well. Ask about layoffs during interviews- if they have laid off, see what they tried to do before doing so. From a morale perspective, it is much higher in companies that try to find other ways to cut costs besides cutting their people. Even if the company had to let people go after trying not to, people are more understanding because the company did everything it could.

Finally, remember that the Business Career Connections (BCC) is here to help you during these difficult times. The right companies are practicing these strategies to stay away from losing valuable assets like yourself.