International Journal of Energy Sector Management

Stock market reactions to layoff announcements - analysis of the renewable energy sector
Stephan Kunert, Dirk Schiereck, Christopher Welkoborsky,
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analysis of the renewable energy sector", International Journal of Energy Sector Management, Vol. 11 Issue: 2, doi: 10.1108/
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 Stock market reactions to layoff announcements
Analysis of the renewable energy sector

Abstract

The global renewable energy sector and most of the producers of wind and solar energy equipment
are struggling. While changes in the regulation and in the promotion of energy production from re-
newable sources reduced the attractiveness of these technologies, many involved companies had
to downsize their workforce in order to increase performance. The public often perceives these an-
nouncements as a way of increasing shareholder wealth at the cost of the employees. Support for
this claim is often given in the form of isolated case study considerations. However, the case may
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be different for the renewable energy sector, as changes in the overall institutional environment
have sustainably deteriorated the prospects of this industry.

This study analyzes stock market reactions of 65 layoff announcements made by companies in the
renewable energy industry in the years from 2005 to 2014. The reactions are measured by cumula-
tive abnormal returns (CARs), which are obtained by utilizing the event study methodology.

It shows a significantly negative market reaction to the announcement of a layoff plan on the event
day. Our findings are generally in line with our expectations and underline the negative perspectives
of the sector from a capital market point of view and the declining importance of the sector with re-
spect to employment numbers.

The results of this study are important for investors when estimating the capital market reactions to
layoff announcements and when they form their own expectations regarding possible future layoff
announcements. For the public, the results are of interest as the prejudice, that layoff plans are
used to increase shareholder wealth, can be dismantled. The opposite is shown.

1
 1 Introduction

The global renewable energy sector and most of the producers of wind and solar energy equipment
are struggling. While changes in the regulation and in the promotion of energy production from re-
newable sources reduced the attractiveness of these technologies and resulted in stock prices de-
clines of renewable stocks (Schiereck and Trillig, 2014) the involved companies had to adjust their
production facilities to changing market conditions. In order to increase performance, many firms
downsized the workforce (Nixon, Hitt, Lee, & Jeong, 2004, p. 1121). Recently, layoff programs have
been announced, e.g., by Hanwha Q CELLS, where more than half of all workers are being laid of
(Hanawha, 2015) and the solar power inverter manufacturer SMA, who announced job cuts totaling
1600 (SMA, 2015).
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The public often perceives these announcements as a way of stabilizing and increasing shareholder
wealth at the cost of the employees (Neus & Walter, 2009, p. 2). Cross-industry support for this
claim is often given in the form of prominent isolated case study considerations. However, the case
may be different for the renewable energy sector as changes in the overall institutional environment
and overall market conditions have sustainably deteriorated the prospects of this industry. The pric-
es of natural energy resources like coal and oil declined significantly, and the use of fracking may
stabilize the oil price on its current level. Reduced subsidies for renewable energy provision founded
on budget restrictions in most industrialized countries run in the same direction. With respect to the-
se worsened long-run conditions, we expect that companies in the renewable energy industry are
not able to improve the stock price performance by downsizing the workforce. Instead, the an-
nouncement of layoffs may be only a confirming signal to clarify investor believes on an ongoing
decline resulting in negative share price reactions. If this expectation meets supporting empirical
evidence, our results would deviate from findings for other industries where the market environment
and outlook are different.

This study analyzes stock market reactions of 65 layoff announcements made by companies in the
renewable energy industry in the years from 2005 to 2014. The reactions are measured by cumula-
tive abnormal returns (CARs), which are obtained by utilizing the event study methodology. Our
findings are generally consistent with our expectations and underline the negative perspectives of
the sector from a capital market point of view and the declining importance of the sector with respect
to employment numbers.

The rest of the paper is organized as follows: Part 2 of the paper provides a literature review. More-
over, a set of testable hypotheses is given to be researched in the empirical analyses. In part 3 we
describe the data set. Part 4 presents the methodology employed. Section 5 reports the empirical
results. The last part 6 gives a conclusion and an outlook.

2
 2 Literature review and set of testable hypotheses

Since the beginning of the century, the global renewable energy sector has experienced higher
growth rates than most other industries. Especially in countries like Denmark, Germany or China,
where renewable energy policies were implemented and investments promoted, growth was strong
(Wüstenhagen & Menichetti, 2012, p. 2). Apart from the implementation of policies, cost reductions
and technological improvement have been strong drivers of growth for the industry. Photovoltaic
modules experienced a price decline of 30% only in 2009, and costs are expected to decrease fur-
ther in the near future (International Energy Agency, 2010, p. 12).

According to Bloomberg New Energy Finance (2011, p. 5), global investments in renewable ener-
gies almost quadrupled in the years from 2004 to 2008. However, the renewable energy sector is
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not immune to crisis. Due to the global financial crisis, growth stopped in 2009, but rebounded with-
in a year with an annual growth of about 30%. Even though the financial crisis only stalled growth
for a short while, structural shifts became obvious in the aftermath. For example, investments in US
wind power showed a sharp decline in 2010, while the Chinese wind market still grew substantially
(Wüstenhagen & Menichetti, 2012, p. 2). In the German market, high government subsidies encour-
aged private investments in solar technology. When the subsidies were cut back, domestic demand
decreased, which resulted in overcapacities. Many companies reacted (and are still reacting) to this
with a reduction of their staff, as it is a mean to reduce variable costs in the short run (Nixon et al.,
2004, p. 1121).

To examine the financial consequences of layoffs on the market value of equity of the concerned
companies event studies are usually applied. These studies measure the changes in stock prices,
which are induced by the public announcement of layoffs. Capital market reactions to layoff an-
nouncements have been empirically analyzed since the early 1990s. Gerpott (2007, pp. 11–29)
gives an extensive overview about previous research and compares 32 cross-industry studies in the
time period from 1990 – 2005. Most of these studies focus on the US capital market. More recent
research by Hillier et al. (2007) and Vu (2012) concentrate on the United Kingdom, and Knauer and
Lachmann (2011) and Neus and Walter (2009) examine the German market. Capelle-Blancard and
Tatu (2012) and Clarenbach and Davies (2001) broaden the view and examine the reactions in a
European context. All of these studies set, however, a geographical focus and do not account for
any differences in industry branches (see Table 1 for a survey).

Fraunhoffer et al. (2014) aim on analyzing a specific industry segment, the global airline industry,
rather than setting a geographical focus. They expect that, because of idiosyncratic industry specif-
ics, investors react differently to layoff announcements depending on the respective branch of in-
dustry. Their approach is in parts also used in this study and has been adjusted to account for in-
dustry specifics of the renewable energy industry. In the same direction Marshall et al. (2012, p.
3
 378) divide their sample into various industry segments, but the companies are only categorized
into one of eight industrial sectors. Elayan, Swales, Maris, and Scott (1998, p. 335) suggest that the
market reaction to a layoff announcement depends on how much the company relies on human
capital. They find that firms relying heavily on human capital are more sensitive to an alteration in
human capital and thus more adversely effected by layoff plans than firms, which rely mostly on
physical capital. Companies in the renewable energy industry are such human capital intensive
firms as the branch is very much research and development driven. The companies rely heavily on
the knowledge and expertise of their engineers and workers.

Downsizing is a frequently used approach by firms in order to reach performance goals, as it reduc-
es costs quickly in the short run. But even if downsizing tends to improve the firms’ profitability, the
investors’ reactions can either be positive or negative (see Table 1), depending on how the future
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performance of the firm is evaluated (Capelle-Blancard & Tatu, 2012, p. 4). Models in favor of posi-
tive reactions argue that the layoffs are expected to decrease the firm’s costs permanently (Chalos
& Chen, Charles J. P., 2002, p. 851; Elayan et al., 1998, p. 331). This implies the assumption that
firms improve productivity, reduce redundancies and thus can maintain output levels with fewer em-
ployees (Collett, 2002, p. 1185; Gerpott, 2007, p. 8).

There are also arguments that point to a negative investor reaction. This would be the case if the
layoff decision is understood as an indication to a not just temporary decrease of customer demand.
The layoff decision would then be considered a structural reaction to declining product demand or
declining investment possibilities (Collett, 2002, p. 1186; Palmon et al., 1997, p. 56). If the declining
product demand affects all companies in a specific market, the negative reactions are sometimes
not restricted to the firm announcing the layoffs. All of its competitors are affected as well, because
investors would anticipate future performance decreases for those firms. If the drop in demand is
restricted to the announcing firm, only its stock price reacts. In this case, the decision to lay people
off is understood as a deficiency to compete in the market (Gerpott, 2007, pp. 8–9).

Another argument for a negative reaction is the loss of human capital, intangible resources and thus
quantity of knowledge in the firm. Furthermore, it is expected that the company is not able to down-
size efficiently and to only lay people off, whose abilities and motivation is below average. High-
performance employees are rationalized as well and their unique knowledge is lost to the company.
Especially for large layoff plans it is also possible that the established relationship of trust between
firm and remaining employees is disrupted, which results in less performant work of those employ-
ees (“survivor’s syndrome”) (Gerpott & Jakopin, 2006, p. 9; Nixon et al., 2004, p. 1122). Additionally,
a negative reaction to a layoff plan would be the case if investors understand the plan as an indica-
tor for an impending crisis situation, especially if the firm already issued a profit warning in the past
(Worrell et al., 1991, p. 672). It is also possible that investors assess the layoff plan as to small and
thus expect it to be ineffective (Gerpott, 2007, p. 10).
4
 INSERT TABLE 1 HERE

As there are various reasons indicating either a positive or a negative reaction to the announcement
of a layoff plan, the first hypothesis to be tested initially aims on the general effect and is as follows:

H1: Stock prices reveal a significant reaction in the case of a layoff announcement for the entire
sample.

As stated above it is not possible to deduct the direction stock prices are going to move after an
announcement with economic reasoning alone. This is why the rationale of a layoff plan is the most
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analyzed influencing factor in literature. Using a rough partitioning, layoff plans can either be cate-
gorized as “proactive” or “reactive” (Abraham, 2004, p. 729; Capelle-Blancard & Tatu, 2012, p. 5;
Gunderson, Verma, & Verma, 1997, p. 367; Lee, 1997, p. 879; McKnight et al., 2002, p. 83; Neus &
Walter, 2009, p. 8). Reactive layoff plans are generally viewed as “K responses to poor financial
performance” (Lee, 1997, p. 885) and an attempt to correct these failures. These are for example
layoff plans that occur due to declining demand, overcapacities in production or weak market condi-
tions (Collett, 2002, p. 1186). Investors are generally expected to react negatively to reactive layoff
announcements as they indicate negative business development and thus reduced future cash
flows (Fraunhoffer et al., 2014, p. 109; Knauer & Lachmann, 2011, p. 1114).

Proactive layoff plans are considered “Kthose that are part of an overall strategic objective” (Lee,
1997, p. 885). They emphasize efficiency-enhancing effects like an overall growth in productivity
and a reduced cost structure in the company. Here, investors are expected to react positively to the
announcement as it indicates increasing future cash flows. Thus, the rationale of a layoff plan is an
important factor and based on the elements above, the following two hypotheses are presented:

H2a: Stock prices for reactive layoff plans reveal a negative reaction.

H2b: Stock prices for proactive layoff plans reveal a positive reaction.

In addition to the classification of announcements as either proactive or reactive, it is also possible

to use more detailed descriptions of the motives behind layoff decisions (Farber & Hallock, 2008, p.
2; Hillier et al., 2007, p. 35; Knauer & Lachmann, 2011, p. 1120). Hillier et al. (2007, p. 471) intro-
duce a set of six motives for layoffs that has since been adapted by other studies. The motives are
not treated as being mutually exclusive, multiple reasons for a specific announcement are possible.
The motives are: (1) reorganization, (2) plant closure, (3) poor performance, (4) fall in demand, (5)
cost cutting, (6) merger or acquisition. If the announcement gives no indication on the motive for the
layoff, it is categorized as (7) no stated reason.

5
 The motives “poor performance” and “fall in demand” can generally be viewed as a sign of bad
business development and thus should cause negative capital market reactions (Worrell et al.,
1991, p. 664). “Reorganization” and “cost cutting” on the other hand signal increasing efficiency and
a positive reaction is expected (Chalos & Chen, Charles J. P., 2002, p. 851; Elayan et al., 1998, p.
331). “Plant closures”, on the one side, indicate reduced costs, but also the need to reduce overca-
pacities. The reaction could go either way, but is assumed to be negative as the expectations of
future revenue-decreases outweigh the positive reactions on short run cost advantages (Knauer &
Lachmann, 2011, p. 1113). Layoff announcements following “mergers or acquisitions” cannot be
considered as either positive or negative per se. Instead, it is assumed that the market already an-
ticipated the realization of synergies in connection with the transaction. Thus, the information about
the layoff is already considered in the stock price (Knauer & Lachmann, 2011, p. 1114).
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In addition to the rationale for the layoffs, studies also analyze the influence of various layoff charac-
teristics (Capelle-Blancard & Tatu, 2012, p. 5; Clarenbach & Davies, 2001, p. 5; Nixon et al., 2004,
p. 1121; Worrell et al., 1991, p. 662). The most researched question in this context is to find out
whether the magnitude of the layoff plan has an influence on investors’ reactions. Layoffs involving
a large percentage of the companies’ workforce are expected to result in stronger, more negative
market reactions than those where only a small part is involved.

One explanation is, if more people leave the company, also more high qualified employees leave
(Worrell et al., 1991, pp. 664–665). This results in a bigger loss of human capital and thus stronger,
negative market reactions (Nixon et al., 2004, p. 1127). Additionally, high layoff ratios can result in
decreased loyalty and motivation of the remaining employees (Knauer & Lachmann, 2011, p. 1114).
The capital market could also react more negatively to the announcement of a large layoff plan as it
is a stronger signal that existing strategies are not working at the company (Clarenbach & Davies,
2001, p. 8). Another argument is that bigger cuts are expected to be not realizable with just the nat-
ural fluctuation of employees. If this is the case, the company has to actively dismiss workers and
has to pay severance, resulting in higher costs for the layoff plan (Knauer & Lachmann, 2011, p.
1114).

Based on this, the following hypothesis is formulated:

H3: Announcements of large layoff plans result in more negative reactions than announcements
of small layoff plans.

Clarenbach and Davies (2001, p. 12) document more layoff announcements in Anglo-American
than in other countries (especially Continental Western European countries). While capital markets
in the first group react significantly negative to the announcements, there is no significant reaction in
the latter group. They interpret this as evidence that due to barriers to job cuts in non-Anglo-
American economies, companies that do announce, have no other options. In this case, the infor-

6
 mation about the firm’s crisis situation is already known to the market and thus causes no reaction.
Thus, the following hypotheses is deducted:

H4: There is a difference in stock market reactions between European and non-European coun-
tries.

3 Sample and data description

The dataset gathered for this study is based on two different types of data. Firstly, there is infor-
mation concerning the layoff announcements and secondly stock prices for the respective event.
Given that we focus on companies specialized in the industry of renewable energies, the first step is
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to identify these companies. There are numerous firms that have one or other business units. In
order not to distort the results of the study, these companies are excluded. Only companies that are
or were listed in one or more renewable energy stock indices1 are taken into account. Companies
listed there are expected to have a high proportion of their revenue generated in renewable ener-
gies. Chinese companies are not taken into consideration, because press censorship prohibits reli-
able information about both the magnitude of the layoffs and the correct event date of the an-
nouncement (Fraunhoffer et al., 2014, p. 112). With these criteria, 87 potential companies are iden-
tified.

To investigate the reaction of the capital market to a specific announcement, it is necessary to know
the exact date of the event. To find this date, a systematic review of company press archives, daily
newspapers and business press is executed. This approach has evolved to be the common method
when conducting event studies concerning layoff announcements and is used for national studies
(Abraham, 2004, p. 732; Knauer & Lachmann, 2011, pp. 1115–1116) as well as global studies
(Fraunhoffer et al., 2014, p. 113). In case of multiple publications about a layoff announcement, the
first one published is used as the event date for the analysis. In order to minimize the risk of adding
a false announcement, at least three different sources have to report about it.

The main part of the search is conducted using the keyword search function of the database Lex-
isNexis for the timeframe from the beginning of 2005 until October 2014. If for the initial search no
distinct announcement date is identified, the press archive of the respective company is used to
determine it.

Minor downsizing events that affected less than 0.5% of the total employees of a company are elim-
inated. Stock prices and stock market indices are extracted from Datastream. Using this approach,
65 events from 23 different companies are identified. In the ten year time frame, the companies laid

1
In detail, the RENIXX World, Photovoltaik Global 30 Index, DAXglobal Alternative Energy Index and ÖkoDAX were used.
7
 off a total of 32,903 workers on 65 different occasions. Table 2 shows the timeframe and geograph-
ical structure of the sample. Concerning the temporal distribution of the sample, it is remarkable that
in the first four years, considered the “boom” years of renewable energies, only four layoff an-
nouncements were made.

INSERT TABLE 2 HERE

In the following years, the number of announcements and total layoffs started to increase. 47% of all
layoffs occurred in the year 2012. This is also driven by Chinese companies entering the market,
and renewable energy growth was especially high there (Zhang & He, 2013, p. 394). Over the last
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10 years, 506 people were laid off per announcement with an average layoff ratio2 of 13.68%.

To find and identify reasons and motives of the layoffs, other data is extracted from the announce-
ments. The approach used in this study is also applied by Knauer and Lachmann (2011). Detailed
descriptive statistics about the variables explained in the following are summarized in Table 3. First,
the announcements are categorized as either proactive or reactive. Since a categorization into one
of the two classes based on the published text is inherently subjective, an alternative approach is
used. The company’s revenue growth (“∆ Revenue”) in the year prior to the announcement is ex-
tracted from Datastream and announcements are either tagged proactive, when growth was posi-
tive, or reactive, when growth was negative (dummy variable “Proactive (D)” equals 1 for a proactive
announcement). Based on this methodology, 57% of all layoff plans are considered proactive.

Hillier et al. (2007, p. 471) and Knauer and Lachmann (2011, p. 1120) differentiate in a broader way
between six motives for layoffs. According to Fraunhoffer et al. (2014, p. 115) three of these motives
are adopted for further investigation: “Reorganization (D)”, “Fall in demand (D)” and “Plant closure
(D)”. They are modeled using dummy variables indicating whether the respective motive was stated
in the announcement or not. If yes, the dummy variable takes the value 1. They are not mutually
exclusive, multiple reasons for one announcement are possible.

INSERT TABLE 3 HERE

Additionally to the motives, the connection between stock returns and several control variables are
analyzed. They are again extracted from Datastream and are dated at the end of the year prior to
the announcement.

2
Layoff ratio = Total layoffs / Total Employees.
8
 1. Market capitalization is used as an indicator of firm size. Filbeck and Webb (2001, p. 42) find
that layoff announcements from smaller firms result in larger stock return responses than
those initiated by larger firms, which is caused by higher information asymmetries in small
firms. In this study, firm size is measured by the natural logarithm of the variable “MV”.

2. The capital market’s expected growth towards the respective company is included in the
model and is measured by the market-to-book ratio (“M2B”) of the respective company
(Gunderson et al., 1997, p. 364).

3. The debt-to-equity ratio (“D2E”) as an indicator of the leverage used by a company is taken
into account (Marshall et al., 2012, p. 390).

4. Elayan et al. (1998, p. 335) find evidence that the general economic situation has an influ-
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ence on the size of the reaction. Thus, the GDP growth of the company’s respective home
country is used as an indicator for this.

5. Announcements are categorized as either a first or a follow-up announcement. Farber and

Hallock (2008, p. 19) conclude that isolated announcements have a larger impact on the
stock price than follow-ups. In this study, announcements that are made six months or less
after another announcement are considered a follow-up. For all other events, the dummy
variable “First (D)” takes the value 1.

6. The total people planned to leave the company are included (“Layoffs”) and

7. the “Layoff ratio”, defined as total layoffs divided by total employees at the end of the last
business year (Nixon et al., 2004, p. 1122). These two figures can be interpreted as a meas-
ure of the magnitude of the layoff announcement to the individual firm.

8. It is analyzed if geographical factors have an effect on magnitude and size of the reaction.
For this, the dummy variable “Europe (D)” is introduced, which takes the value 1, if the com-
pany announcing the layoff plan is from Europe.

9. It is checked if even further specialization concerning the industry branches is necessary.

For this, exemplarily, the dummy variable “Solar (D)” is introduced.

4 Methodology

In order to measure the effect of a layoff announcement on the stock price we follow similar recent
empirical studies, which were cited in chapter 2, and use the event study methodology. It relies on
the efficient market hypothesis (EMH) that asserts that stock prices fully and immediately reflect all
available market information correctly. The general approach by Ball and Brown (1968, pp. 159ff.)
and Fama et al. (1969, pp. 1ff.) when conducting an event study is still widely used and has become
9
 standard to examine the impact of firm-specific (and economy wide) events on the value of a firm.
The basic principle of the procedure is that the investor’s reaction to an announcement can be
measured by comparing the actual stock return with the return that would have resulted in the ab-
sence of an announcement. The whole procedure is (for example) described by MacKinlay (1997):

To calculate this abnormal return ARi,t of a stock i at any given date t the actual return of the stock is
subtracted by the expected return E(Ri,t):

, = , − (, ) (1)

The expected return E(Ri,t) is calculated using a market model (also known as market and risk ad-
justed returns model) which has proven to be the most robust model in comparison with others
(Brown & Warner, 1980; Brown & Warner, 1985; Cable & Holland, 1999, p. 84)3. It asserts a linear
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relationship between the return of stock i on day t and the market return RM,t:

,  =  +  ∗ , + , (2)

Thus, the expected return of a stock consists of two different parts. The parameter αi measures the
part of an average daily return that is not influenced by market movements and the term βi*RM,t is
the proportion that is affected by market wide factors. The two parameters α, β are estimated using
a linear regression with an ordinary least squares (OLS) estimation on the basis of a time frame of
250 trading days (in the following called “estimation period”) in the time from T-270 to T-21. 250 trading
days roughly represent one calendar year in order to adjust for any possible seasonal non-
stationarity in stock prices (Nixon et al., 2004, p. 1124).

As described in chapter 3, all capital market data is extracted from Datastream and is adjusted for
dividends as well as changes in the capital structure.

If the capital market effects to be analyzed are not restricted to a single day but rather a multiple-
day time period (in the following called “event period”), the abnormal returns are cumulated to
measure the effect. The cumulative abnormal return CARi of a stock i is the sum of all abnormal
returns in the event period starting day t1 and ending day t2 :



 = 
, (3)



The average abnormal return AARt on any given day t with N available stocks is calculated as fol-
lows:

3
Other possible models, but not presented here as the market model is the superior one, are for example the constant
mean returns model (also known as mean adjusted returns model) or the capital asset pricing model (MacKinlay,
1997, pp. 17-19). The findings in this study are robust as the differences between the used market model and alter-
native models as CAPM and CMRM are negligible.
10
 
1


 = ∗ 
, (4)



The combination of AARt and CARi is the cumulative average abnormal return CAAR:

1


 = ∗  
 (5)



To test the statistical significance of the empirical results, different test are employed. This study
features two parametric tests (regular t-test and Boehmer-test) and one non-parametric test (Wil-
coxon rank-sum test).
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5 Empirical results

As a first step, it is analyzed whether the announcement of a layoff plan reveals new information to
the investors and thus causes a change in stock prices. An average 2.99% price decline on the
event date, which is significant on the 1% level for both the BMP-test and the regular t-test, can be
obtained. The two days following the announcement date also show a significant price decline (see
figure 1). Thus, our hypothesis is supported. For the entire sample, stock prices do reveal a signifi-
cant reaction in form of significant negative returns. This affirms results from Clarenbach and Davies
(2001, p. 23) as well as Hallock (1998, p. 710), who also determine negative capital market reac-
tions on the event date. But these studies report only significant price declines of -1.1% and -0.4%,
respectively. Thus, investors’ reactions for the renewable energy sector seem to be much higher.

Figure 1 illustrates this finding for a time period starting 20 days before the event date and ending
20 days after. It presents separate results for the entire sample as well as for proactive and reactive
announcements. The classification into either proactive or reactive is based on the revenue growth
in the year prior to the announcement. There seems to be no obvious difference between the two
groups.

INSERT FIGURE 1 HERE

Table 4 displays CARs for all of the three groups in different time periods around the event date. For
the entire sample, all of the time periods show a significantly negative market reaction. Nearly the
same reaction can be observed for the panel of proactive announcements. This result is noteworthy,
as most studies so far have shown positive market reactions to proactive announcements (Capelle-
Blancard & Tatu, 2012, p. 21; Knauer & Lachmann, 2011, p. 1123; Palmon et al., 1997, p. 58). Only
Lee (1997, p. 888) also reports a negative (but insignificant) reaction to proactive announcements.

11
 As the results for the renewable energy sector differ so much from other cross-industrial studies and
the results for the airline industry (Fraunhoffer et al., 2014), this indicates the need for further indus-
try-specific studies.

In this study, market reactions to reactive announcements are negative for the different event peri-
ods, which is consistent with past studies. Elayan et al. (1998, p. 335) reason this is due to the
companies’ dependence on human capital. As a development-driven sector of industry, renewable
energies depend on the knowledge of the workers and thus show a negative reaction. As presented
in panel IV, the differences in mean and median of proactive and reactive announcements are in-
significant. We can thus conclude that investors do not react differently for the two types of an-
nouncements. Based on these results, hypothesis H2a is supported and hypothesis H2b rejected.
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INSERT TABLE 4 HERE

Table 5 shows ARs for different sub-samples on the event day. The sub-samples are grouped into
quartiles of firm and layoff specific characteristics.

INSERT TABLE 5 HERE

Based on the values for the event day only, there seems to be no obvious connection between the
layoff magnitude and the size of the reaction. Neither the layoff ratio nor total layoffs show a clear
trend that large layoff announcements result in stronger market reactions than small announce-
ments. Thus, for the event day, there is no evidence that supports hypothesis 3. The same can be
observed for ∆ Revenue as the results reveal no clear trend that companies, which performed better
in the past year, show a more positive reaction.

The dummy variables reveal a differentiating result for the announcements under consideration.
European and solar companies display a strong negative reaction on the event day. The sub-
sample of European companies shows a stock price decline of -3.574%, which supports hypothesis
4 and is an indicator that stock prices of Continental European firms react differently to layoff an-
nouncements. Solar firms show a decline of -4.272% on the event day, which is 43% higher than
the average reaction of the entire sample. Results are only a little different for the [-1,+1] event peri-
od. The sub-sample of European companies shows only a slightly lower CAR than the entire sam-
ple with -6.044%, the firms of the solar industry show a stock price decline of -9.573%. One possible
explanation for the solar firms’ strong reactions is that the solar industry was hit especially hard by
cuts of government subsidies.

12
 However, these all are only first impressions of univariate comparisons. Table 6 summarizes the
results of the multivariate regression analysis for the event day where the variables are all checked
for stationarity. Even though the explanatory power of the models is only moderate (range of R2
adjusted between 5.751% and 10.43%) and most variables are statistically insignificant, the results
do support the findings of the univariate analyses.

For the event day, there is no statistically significant evidence for an impact of the classification into
proactive and reactive announcements. The variable ∆Rev is insignificant in all of the three different
models. These findings are in contrast to previous cross industrial studies (Capelle-Blancard & Tatu,
2012, p. 21; Knauer & Lachmann, 2011, p. 1123) and for the airline industry (Fraunhoffer et al.,
2014, p. 122), where it was found that the classification into proactive and reactive announcements
is in fact one of the key variables. A three day event period ([-1;1]) supports these findings. There is
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again no evidence for a connection between past revenue growth (and thus a classification into
proactive and reactive announcements) and the intensity of the market reaction.

Hypothesis 3 states a negative effect of a layoff plan’s relative size on the shareholder value. Larger
layoff plans should thus result in more negative reactions. For both event periods ([0] and [-1;1]),
this connection is not supported. Neither total layoffs nor layoff ratio are significantly different from
zero.

INSERT TABLE 6 HERE

Alternative reasons for layoffs stated in the announcements show no significant reaction either. The
fact whether the announcements was a first announcement of a series of announcements has no
explanatory content on the dependent variables in both different event periods. The same goes for
the question whether the layoff was due to reorganizational purposes or due to a fall in demand. It
has no effect if a plant closure is announced in the layoff plan.

However, the dummy indicating whether the company is part of the solar industry has a significant
influence in all models. This can be observed for both event periods. Firms in the solar industry are
rated especially negative when it comes to layoff announcements.

Hypothesis 4 aims to find any regional differences in stock market reactions. While the univariate
comparison indicates a more negative reaction for the sub-sample of European firms, the multivari-
ate analysis does not support this result. The explanatory content of the dummy variable is insignifi-
cant in all models and both event periods. This is in contrast to Clarenbach and Davies (2001, pp.
24f.), who find regional differences for Anglo-American and non-Anglo-American countries and sup-
ports the findings of Fraunhoffer et al. (2014, p. 132).

13
 6 Conclusion

This study shows a significantly negative market reaction to the announcement of a layoff plan on
the event day of -2.99% (in a three day event period of -5.82%). This affirms the results of other
studies like Elayan et al. (1998) and Hallock (1998), who also determine negative capital market
reactions on the event date. But in contrast to these previous findings, investors’ reactions for the
renewable energy sector seem to be much higher. Investors apparently rate the layoff plan as a
highly relevant negative information regarding the firm’s future prospects, indicating that the firm’s
investment or growth opportunities are not as good as previously thought (Elayan et al., 1998).
Managers of companies in the renewable industry have to be aware of these negative reactions
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when they time e.g. financing decisions which can depend on the share price.

In order to explain the variance in the results, we aim on finding relevant factors to explain these
disparities. To do this, announcements are categorized as either proactive or reactive in a rough
classification. For the entire sample, all of the investigated time periods show a significant negative
market reaction. Nearly the same reaction can be observed for the panel of proactive announce-
ments. This is worth remarking as most studies have shown positive market reactions to proactive
announcements so that the results for the renewable energy sector differ very much from other
cross-industrial studies. Market reactions to reactive announcements are negative which is in line
with past studies. Thus, for the event day and a three day event period ([-1;1]), there is no statisti-
cally significant evidence for an impact of the classification into pro- and reactive announcements,
which is contrary to former cross industrial studies as stated above.

Also unlike previous studies, neither the layoff ratio nor total layoffs show a clear trend that the large
layoff announcements result in stronger market reactions than small ones.

Finally, as supported by the findings of Fraunhoffer et al. (2014) but in contrast to Clarenbach &
Davis (2001) no differences in stock market returns resulting from regional differences can be found
for the renewable energy sector.

14
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Table 1: Past studies on market reactions to layoff announcements

Year Authors Region Announcements Time Classification AAR [0] Classification CAAR Classification CAAR
[-1;+1] [-2;+2]
Abowd, 1980-
1990 Milkovich, USA 344 0.05% -0.08 0.12%
and Hannon 1987
Worrell, 1979-
1991 Davidson, and USA 194 0.21% -0.41%*
Sharma 1987

Reactive -
Palmon, Sun, 1982- 2.23%***
1997 and Tang USA 140 1990
Proactive 0.80%***
1980- Reactive 1.31% Reactive -2.30%*
88 1984
McKnight, Proactive 1.07% Proactive 1.73%
2002 Lowrie, and UK - -
Coles 1991- Reactive 2.58%*** Reactive 3.46%***
147 1994
Proactive 0.36% Proactive 0.30%
1993- Reactive -0.07%
2004 Abraham USA 154 1994 Proactive -0.07%
Hillier,
Marshall, 1990-
2007 McColgan, and UK 322 2000 -0.81%*
Werema
Reactive -
Neus and 1995- 0.76%**
2009 Walter Germany 265 2006
Proactive 0.03%
-
Knauer and 2000- Reactive 0.77%** Reactive -0.72%
2011 Lachmann Germany 136 2009
Proactive 0.76%** Proactive 0.25%
Capelle- Reactive -
2012 Blancard and Europe 1605 2002- 0.88%***
2008
Tatu Proactive 0.78%***
Marshall, Non-crisis 0.51%* Non-crisis 0.80%**
2012 McColgan, and UK 143 2005-
McLeish 2008 -
Crisis Crisis -1.95%**
1.75%***
Fraunhoffer, Reactive -2.39%* Reactive -0.98%
Mietzner, 2003-
2014 Schiereck, Global 84 2012
and Schneider Proactive 1.60%** Proactive 2.37%**

The table gives an overview on past studies. The table is based on Gerpott (2007, p. 14) and has been
modified to account for any differences for proactive and reactive announcements. *, **, ***
symbolize significance on the 10%, 5% and 1% level, respectively.
 Table 2: Timeframe and geographical information of the sample

Panel I Ø
Ann. Layoffs Ø Layoffs Layoff
Year ratio
2005 2 725 363 8.38%
2007 1 500 500 33.78%
2008 1 90 90 23.08%
2009 6 2 746 458 8.98%
2010 8 3 911 489 12.19%
2011 14 5 805 415 16.68%
2012 19 15 399 810 14.08%
2013 8 2 120 265 9.76%
2014 6 1 607 268 14.14%
Total 65 32 903 506 13.68%
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Panel II Ø
Ann. Layoffs Ø Layoffs Layoff
Country ratio
Canada 3 245 82 9.61%
Denmark 6 12 260 2 043 9.96%
Germany 16 5 862 366 14.57%
India 3 1 020 340 2.57%
Norway 6 2 220 370 9.71%
Spain 6 2 400 400 4.99%
Switzerland 3 850 283 10.96%
US 22 8 046 366 19.93%
Total 65 32 903 506 13.68%

Panel I displays the timetable of the layoff announcements. Column “ Ann. ”

shows the total announcements of the respective year, columns
“ L ayoffs ” and “ Ø Layoffs ” show total and average of people laid off,
respectively. “ Ø Layoff ratio ” shows the average of the layoff ratio
per company and is calculated as the average of layoffs divided by
total employees at the beginning of the year. Panel II displays
geographical information of the sample. Here, values are not aggregated
by year, but by country.
 Table 3: Descriptive statistics of the sample

Mean Median St. Dev. Min Q25 Q75 Max

∆ Revenue 0.162 0.106 0.442 -0.686 -0.156 0.419 1.370
Proactive (D) 0.569 1.000 0.495 0.000 0.000 1.000 1.000
Reorganization (D) 0.400 0.000 0.490 0.000 0.000 1.000 1.000
Fall in demand (D) 0.227 0.000 0.447 0.000 0.000 1.000 1.000
Plant closure (D) 0.308 0.000 0.462 0.000 0.000 1.000 1.000
MV 1 284 595 1 769 8 237 1 699 8 678
M2B 1.918 1.100 2.535 -1.990 0.740 2.220 14.980
D2E 1.127 0.507 3.263 -6.986 0.156 0.885 17.101
GDP growth 0.014 0.016 0.023 -0.051 0.004 0.025 0.085
First (D) 0.846 1.000 0.361 0.000 1.000 1.000 1.000
Layoffs 506 200 679 12 100 600 3 000
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Layoff ratio 0.137 0.096 0.146 0.007 0.042 0.190 0.774

Europe (D) 0.569 1.000 0.495 0.000 0.000 1.000 1.000
Solar (D) 0.631 1.000 0.486 0.000 0.000 1.000 1.000
Employees 5 367 3 510 5 764 192 1 500 6 721 22 721

The table displays the descriptive statistics of the analyzed variables.

“ ∆ Revenue ” is the revenue growth rate in the year prior to the
announcement, ” Proactive (D) ” indicates whether the announcement was
proactive ( =1) or reactive ( =0), “ Reorganization (D) ” and “ Fall in
demand (D) ” show whether the reason stated for the layoff was for
reorganizational purposes or decreasing demand, respectively. “ Plant
closure ” indicates if a production plant was shutdown (1=yes, 0=no), ,
“ M V ” is the market value (in million €), “ M2B ” is the market to book
ratio, “ D2E ” is the debt to equity ratio, “ GDP growth ” is the GDP
growth of the company’s respective home country, “ First (D) ” is a
dummy variable indicating whether the announcement was a first
announcement ( =1) or a follow-up ( =0), “ Layoffs ” are the layoffs as
announced by the company, “ Layoff ratio” is “ Layoffs ” divided by the
respective “ Employees ” , “ Employees ” are the total employees of the
company at the end of the last year, “ E urope (D) ” indicates whether
the company is from Europe and “ Solar (D) ” indicates companies of the
solar industry.
 Table 4: Cumulative abnormal returns for different event periods

Cumulative abnormal Boehmer Wilcoxon

return test t-test rank sum
test
Event
period Average Median z-value t-value z-value n
Panel I: all announcements
[0;0] -2.992% -1.189% -3.024 *** -5.601 *** -1.718 * 65
[-1;0] -3.730% -1.069% -2.769 *** -4.937 *** -2.206 ** 65
[0;+1] -5.077% -2.632% -3.566 *** -6.721 *** -2.430 ** 65
[-1;+3] -6.992% -2.311% -3.794 *** -5.853 *** -2.857 *** 65
[-5;+5] -7.777% -6.016% -3.381 *** -4.389 *** -2.373 ** 65
[-10;+10] -8.344% -5.081% -2.817 *** -3.408 *** -1.780 * 65

Panel II: proactive

announcements
[0;0] -4.037% -1.189% -2.451 ** -6.213 *** -1.718 * 37
[-1;0] -4.199% 0.092% -2.485 ** -4.570 *** -1.495 37
[0;+1] -5.070% -0.880% -2.571 ** -5.517 *** -2.303 ** 37
[-1;+3] -6.091% -2.311% -2.836 *** -4.193 *** -1.895 ** 37
[-5;+5] -6.190% -3.912% -2.669 *** -2.872 *** -1.316 37
[-10;+10] -8.127% -7.378% -2.667 *** -2.729 *** -1.507 37
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Panel III: reactive

announcements
[0;0] -1.611% -1.360% -1.781 -1.762 -1.594 28
[-1;0] -3.111% -1.432% -1.279 -2.406 ** -2.235 ** 28
[0;+1] -5.088% -4.032% -2.522 ** -3.935 *** -2.342 ** 28
[-1;+3] -8.181% -2.332% -2.510 ** -4.002 *** -3.071 *** 28
[-5;+5] -9.875% -7.326% -2.049 ** -3.257 *** -2.479 ** 28
[-10;+10] -8.631% -4.035% -1.190 -2.060 -1.632 28

Panel IV: Δ P II - Δ P II - WRS-

t-test
differences P III P III test
Average t-value Median z-value
[0;0] -2.426% -0.987 0.171% -0.073
[-1;0] -1.087% -0.391 1.524% 0.007
[0;+1] 0.018% 0.006 3.151% 0.457
[-1;+3] 2.090% 0.562 0.021% 0.000
[-5;+5] 3.685% 0.802 3.415% 0.603
[-10;+10] 0.504% 0.091 -3.343% -0.113

The table presents cumulative abnormal returns of different event periods. The event
day is day 0 in the table. Abnormal returns were calculated using a 250 day
estimation period from T-270 through T-21. Financial data is extracted from
Thomson Reuters Datastream using the total return index. Panel I displays all
announcements while panel II and panel III only consider proactive or reactive
announcements. In panel IV, the differences of panel II and panel III in
average and median are tested for significance. *, ** and *** signal
significance on the 10%, 5% and 1% level, respectively.
 Table 5: Firm and layoff characteristics with ARs on the event day

Abnormal return [0.0] Boehmer t-test Wilcoxon

test rank sum
test
Characteristic Average Median z-value t-value z-value n
Complete sample -2.992% -1.189% -3.024 *** -5.601 *** -1.718 * 65
Layoff ratio
1. Quartile -1.770% -0.992% -0.908 -1.867 * -1.649 * 17
2. Quartile -3.660% -0.044% -0.883 -3.006 *** -1.718 * 16
3. Quartile -5.576% -4.355% -3.702 *** -5.940 *** -1.718 * 16
4. Quartile -1.038% -1.494% -0.952 -0.843 -1.221 16
Employees
1. Quartile -5.533% -2.913% -1.821 * -3.758 *** -1.704 * 15
2. Quartile -1.672% -1.619% -1.357 -1.495 -1.580 18
3. Quartile -4.792% -2.037% -2.588 *** -5.299 *** -1.718 * 17
4. Quartile 0.006% 1.664% 0.092 0.007 -0.035 15
Total layoffs
1. Quartile -4.474% -0.885% -1.264 -4.105 *** -1.718 * 16
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2. Quartile -2.759% -1.448% -1.533 -2.545 ** -1.718 * 17

3. Quartile -2.215% -0.814% -1.623 -1.657 -1.553 16
4. Quartile -2.535% -1.602% -1.503 -2.922 ** -1.718 * 16
Market/book ratio
1. Quartile -5.168% -2.913% -1.746 * -4.253 *** -1.718 * 15
2. Quartile -1.964% -1.742% -1.396 -1.998 * -1.635 18
3. Quartile -1.066% -0.245% -0.664 -1.137 -1.332 17
4. Quartile -3.805% -0.777% -1.946 * -2.953 ** -1.691 * 15
Debt/equity ratio
1. Quartile -5.557% -5.514% -3.263 *** -5.890 *** -1.718 * 15
2. Quartile -2.438% -0.418% -1.373 -2.637 ** -1.704 * 16
3. Quartile -0.523% -0.967% -0.486 -0.528 -0.642 17
4. Quartile -0.178% -0.364% -0.265 -0.127 -0.090 15
GDP growth
1. Quartile -0.981% -0.160% -0.723 -0.889 -1.070 16
2. Quartile -2.849% -2.043% -2.058 ** -2.523 ** -1.704 * 18
3. Quartile -5.590% -2.913% -1.623 -5.164 *** -1.718 * 15
4. Quartile -2.728% -1.078% -1.512 -2.652 ** -1.718 * 16
∆ Revenue
1. Quartile -1.912% -1.709% -1.347 -1.804 * -1.608 18
2. Quartile -0.226% -0.967% -0.632 -0.192 -0.242 15
3. Quartile -7.023% -2.481% -2.164 ** -6.766 *** -1.718 * 16
4. Quartile -2.769% -1.318% -1.611 -2.549 ** -1.691 * 16
Dummy Variables
Reorganization(D) -3.759% -3.078% -2.727 *** -4.968 *** -1.718 * 26
Fall in demand -1.667% -2.481% -1.726 * -1.552 -1.566 18
(D)
Plant closing (D) -3.518% -1.165% -1.296 -3.338 *** -1.718 * 20
First (D) -2.446% -0.979% -2.653 *** -4.312 *** -1.718 * 50
European company -3.574% -2.049% -3.373 *** -5.415 *** -1.718 * 37
(D)
Solar (D) -4.272% -1.553% -2.992 *** -5.869 *** -1.718 * 41

The table shows mean and median abnormal returns on the event date and the
respective values of t-test, Boehmer test and Wilcoxon rank sum test.
Abnormal returns were calculated using a 250 day estimation period from
T-270 through T-21. Financial data is extracted from Thomson Reuters
Datastream using the total return index. ARs are (1) stated for the
entire sample, (2) grouped after different quartiles concerning layoff
characteristics and (3) calculated for sub-samples where specific dummy
variables take the value 1. *, ** and *** signal significance on the
10%, 5% and 1% level, respectively.
 Table 6: Regression coefficients for the event day

AR [0;0] Model t- Model t- Model t-

I value II value III value
Characteristics
Intercept -0.046 -0.653 -0.060 -0.477 -0.037 -0.334
∆Rev 0.012 0.449 0.011 0.430
LayRt 0.169 1.308
ln(Lay) 0.024 0.845
First(D) 0.010 0.275 0.024 0.559
Reorg(D) -0.035 -1.405 -0.033 -1.400
FiD (D) 0.038 1.342 0.036 1.240
PlCl(D) -0.017 -0.466 -0.005 -0.177
Si(D) -0.051 -2.238 ** -0.046 -2.254 **
Control Variables
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ln(MV) 0.010 0.464 0.018 0.554 -0.007 -0.367

M2B -0.004 -0.552 -0.006 -0.705 -0.003 -0.347
D2E 0.012 1.676 0.017 1.781 * 0.014 1.780 *
GDP -0.281 -0.792 -0.162 -0.426 -0.318 -0.699
EUR(D) -0.023 -1.038 -0.028 -1.106 -0.037 -1.644
R2 13.114% 27.225% 23.925%
2
R adj. 5.751% 10.431% 6.370%

The table shows the coefficients of the OLS-regression with the dependent
variable AR0. ∆Rev is revenue growth in the year prior to the
announcement. LayRt is the layoff ratio. Ln(Lay) is the natural
logarithm of total layoffs. First(D), Reorg(D), FiD(D), PlCl(D), Si(D)
are dummy variables indicating whether the announcement was a first
announcement of a series, was for reorganizational purposes, was due to
a fall in demand, whether a plant was closed and whether the firm is
active in the solar industry. Ln(MV) is the natural logarithm of the
market capitalization. M2B symbolizes the market to book ratio of the
company and D2E the debt to equity ratio. GDP is the growth ratio of
the respective home country of the firm. EUR(D) indicates whether the
company is from Europe. *, **, *** signal significance on the 10%, 5%
and 1% level, respectively. The t-statistics are calculated using the
adjusted standard errors after White (1980).
 Downloaded by Cornell University Library At 18:30 19 May 2017 (PT)

2%

0%
all
proactive
-2% reactive

-4%

-6%

-8%

cumulative average abnormal return (in %)

-10%

-12%

0
1
2
3
4
5
6
7
8
9

-9
-8
-7
-6
-5
-4
-3
-2
-1
10
11
12
13
14
15
16
17
18
19
20

-20
-19
-18
-17
-16
-15
-14
-13
-12
-11
-10
days relative to event date