The stock market reaction to layoff announcements in Germany

Previous studies on shareholder reaction to layoff announcements have concentrated on American stock markets. This paper extends research to shareholder reactions on the Frankfurt Stock Exchange during the years 1990 to 1996. Using event study methodology and daily return data from the Karlsruher Kapitalmarktdatenbank, the shares of 30 firms are tested for abnormal returns on and around the day of a layoff announcement. Daily abnormal returns were found to be significant and negative for the announcement day itself and the days just prior to it. Cumulative abnormal returns were found to be significant and negative for the ten days preceding the announcement and significant and positive for the ten days following the announcement. These results suggest that while layoffs are generally perceived as bad news by investors in Germany, they are also seen as a sign that a company is heading in the right direction.