We study the reaction of stock prices to announcements of reductions in force
(RIFs) using a sample of nearly 3878 such announcements in 1176 large firms during the
1970-97 period collected from the Wall Street Journal Index. We note that, although
there has been a dramatic secular increase in news stories related to job loss, the total
number of actual announcements for the firms in our sample follows the business cycle
quite closely. We then examine changes over time in standard summary statistics (means,
medians, fraction negative) of the distribution of stock market reactions as well as changes
over time in kernel density estimates of this distribution. We find clear evidence that the
distribution of stock market reactions has shifted to the right (became less negative) over
time. One possible explanation for this change is that, over the last three decades, RIFs
designed to improve efficiency have become more common relative to RIFs designed to
cope with reductions in product demand. We find that, although this explanation shows
some promise, most of the decline in the negative average stock price reaction remains
unexplained.

We report preliminary results of an analysis of the reaction of stock prices to
announcements of reductions in force (RIFs) using a large sample of such announcements
during the 1970-1997 period collected from the Wall Street Journal index. We find some
evidence that the stock market reaction to the announcement of RIFs has become less
negative over this period. While a complete understanding of the underlying causes of
this finding awaits further research, one possible interpretation is that, over the last three
decades, RIF s designed to improve efiiciency have become more common relative to RIFs
designed to cope with reductions in product demand.

In this paper we provide theoretical and empirical analyses of an
asymmetric-information model of layoffs in which the current employer is
better informed about its workers’ abilities than prospective employers
are. The key feature of the model is that when firms have discretion with
respect to whom to lay off, the market infers that laid-off workers are of
low ability. Since no such negative inference should be attached to
workers displaced in a plant closing, our model predicts that the post-
displacement wages of otherwise observationally equivalent workers will be
higher for those displaced by plant closings than for those displaced by
layoffs. A simple extension of our model predicts that the post-
displacement unemployment duration of otherwise observationally equivalent
workers will be lower for those displaced by plant closings than for those
displaced by layoffs.
In our empirical work, we use data from the Displaced Workers Supplements
in the January l984 and 1986 Current Population Surveys. For our whole
sample, we find that the evidence (with respect to both re-employment wages
and post-displacement unemployment duration) is consistent with the idea
that laid-off workers are viewed less favorably by the market than are
those losing jobs in plant closings. Furthermore, our findings are much
stronger for workers laid-off from jobs where employers have discretion
over whom to lay off, and much weaker for workers laid-off from jobs where
employers have little or no discretion over whom to lay off.

Firms offer highly complex contracts to their employees. These contracts contain a mix
of various incentives, such as fixed wages, bonuses, promise of promotion, and threat of
firing. This paper aims at explaining the reason why this incentive-mix arises. In particular,
the model focuses on why firms are combining promotions and bonuses with firing. The
theoretical model proposed is a job-assignment model with heterogeneous employees. In
this model the firm is concerned about job assignment, because the overall productivity
of the firm depends upon the quality of the employees and their allocation to jobs. The
model shows that firing has a dual role. Firing creates incentives for the employees, and
it is used as a sorting device that allows the firm to improve workforce quality. Thus,
quality-concerned firms might want to combine cost-efficient incentives such as promotions
and bonuses with firing. To comply with the Gibbons and Waldman critique, a large set of
the model’s broader predictions is stated explicitly and tested on the personnel records from
a large pharmaceutical company. The model’s predictions are shown to be consistent with
the data.

Unlike existing models which rely heavily on assumptions regarding unions’
distributional preferences, we present a very simple model in which union
seniority-layoff rules and rising seniority-wage profiles result from
optimal price discrimination against the firm. Surprisingly, even when
cash transfers among union members are ruled out, unions’ optimal
seniority-wage profiles are likely to be completely unaffected by their
distributional preferences because of a kink in the utility-possibility
frontier. This suggests that the simple technology of price discrimination
may play a key role, hitherto unappreciated, in explaining union policies
that affect the relative wellbeing of different union members.