Divergent Market Responses to Human Capital Reorganizations

The stock market response to human capital downsizing events is on average negative. Firms maximize value by signalling to investors the types and nature of their capital budgeting decisions. Human capital restructuring is one such capital budgeting signal. This paper expands on previous research by examining market reactions to firm characteristics, specific firm decisions and certain external macroeconomic conditions. We find that the market response to the human capital downsizing events is firm specific and depends on macroeconomic conditions. We confirm our results using robustness testing. For firms responding positively to the downsizing event, size or analyst following, the firm’s technological intensity and simultaneous asset reorganization are significant contributors to the market response. For the positive subsample, a positive movement in the business cycle and the commercialization of the internet are associated with positive market returns for downsizing events. Significant factors for firms responding negatively include potential financial distress and offshoring. Technological intensity is also a significant influence, but is different for the two subsamples. For positive responding firms, the market may perceive that the firm is pro-actively managing its costs. For the negative responding firms, the market may perceive that knowledge workers may not be available when and if the firm recovers. For the negative subsample, commercialization of the internet and white-collar outsourcing intensify the negative market response.