Mass Layoffs and Shareholder Value Orientation among Large U.S. Firms

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Abstract

This paper explores the linkage between corporate downsizing and the dominance of a corporate governance model that espouses shareholder value maximization principle. I examine two related questions. First, how does the dominance of shareholder value orientation affect the adoption of downsizing strategy among large corporations? Second, do top managers who are responsible for downsizing decisions receive higher compensation? The results from an analysis of 95 largest U.S. corporations support the hypothesis that some of the key characteristics of shareholder value orientation are significantly associated with a greater probability of layoffs, after controlling for economic determinants of layoffs. Specifically, firms that pay higher dividends to shareholders and firms led by finance-oriented CEOs are more likely to announce layoffs than other firms. Also, there is evidence that CEO compensation increases after layoff announcements, controlling for other factors as well as possible endogeneity of layoff decisions.

Author

• Taekjin Shin, San Diego State University