There used to be two types of layoffs: Those that investors cheered, and those that they panned. The first category—which involved the announcement of some sort of strategic restructuring—have long been associated with a pop in the stock. Meanwhile if the layoffs were due to declining sales and rising costs, investors would sell.
But recently Goldman Sachs’ analysts have picked up on a new twist.
“Linking recent layoff announcements to public companies’ earnings reports and stock market data, we find that the recent increase in layoff announcements came mainly from companies that attributed their layoffs to benign factors, such as restructuring driven by automation and technological advancements.” But instead of going up, these stocks fell by an average of 2%. And companies that cited restructurings were punished even more harshly. As the analysts wrote, “This suggests that, despite the benign justifications offered, the equity market has perceived recent layoff announcements as a negative signal about these companies’ prospects.”
This will be a pattern to continue watching, as Goldman predicts a “potential rise” in layoffs given commentary they’ve been hearing during earnings season, which they say is “motivated in part by a desire to use AI to reduce labor costs.”
So why have investors changed their tune on restructuring-driven layoffs?
The most obvious reason, Goldman’s analysts assert, is that they simply don’t believe what companies are saying. The analysts found that companies that have announced layoffs recently have “experienced higher capex, debt, and interest expense growth and lower profit growth than comparable companies within the same industries this year.” Meaning those staff cuts “might have actually been driven by more concerning reasons like the need to reduce costs to offset rising interest expense and declining profitability.”
