Journal of Business Finance & Accounting, 34(3) & (4), 467–494, April/May 2007, 0306-686X doi: 10.1111/j.1468-5957.2007.02042.x Employee Layoffs, Shareholder Wealth and Firm Performance: Evidence from the UK David Hillier, Andrew Marshall, Patrick McColgan and Samwel Werema ∗ Abstract: We examine the financial performance of UK listed companies surrounding the announcement of permanent employee layoffs. We find that poor operating and stock price performance, increased gearing, and threats from external markets for corporate control precede employee layoffs. Layoff announcements elicit a significantly negative stock price reaction, which is driven by announcements that are reactive to poor financial conditions. We also find that layoffs result in significant increases in employee productivity and corporate focus. We conclude that layoffs represent an efficient response to poor financial conditions, but that their occurrence is strongly dependent on pressure from external control markets. Keywords: corporate control, corporate restructuring, employee layoffs, firm performance 1. INTRODUCTION Despite considerable attention to the issue of employee layoffs in the financial press, to date little research has been carried out on the topic in relation to other forms of corporate restructuring, particularly outside of the US. 1 In contrast to divestitures, where assets are sold as a going concern, layoffs represent a discontinuance of operations by the firm. Jensen (1993) describes layoffs as representing a means of ∗ The authors are respectively from Leeds University Business School, University of Leeds; the Department of Accounting and Finance, University of Strathclyde; the Department of Accounting and Finance, University of Strathclyde; and the Faculty of Business Management, Open University of Tanzania, Tanzania. They would like to thank Andrew Stark (editor), an anonymous referee and seminar participants at the European Accounting Association Annual Congress, 2006, and the JBFA Capital Markets Conference, 2006 for helpful comments on previous versions of this paper. They would also like to thank Martin Kemmitt for helpful research assistance. All remaining errors are the authors’ own. Address for correspondence: Patrick McColgan, Department of Accounting and Finance, University of Strathclyde, Curran Building, 100 Cathedral Street, Glasgow G4 0LN, UK. e-mail: patrick.mccolgan@strath.ac.uk. 1 Worrell et al. (1991), Palmon et al. (1997), Hallock (1998) and Chalos and Chen (2002) are US studies of corporate layoffs. Lee (1997) provides a comparative analysis of layoff announcements by US and Japanese companies. Collett (2002) and McKnight et al. (2002) are the only studies to examine this issue directly in the context of UK companies, and both of these studies focus only on the stock price response to layoff announcements. Also in the UK context, Beckmann and Forbes (2004) provide an analysis of the impact of takeovers on employment levels, but do not examine the determinants and outcomes of layoffs. C  2007 The Authors Journal compilation C  2007 Blackwell Publishing Ltd, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA. 467