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Max's Investment World Stock Market Challenge

Layoff Announcements Not Necessarily A Positive Development

Layoffs, at least for the last decade, have become so routine that no one bats an eyelash anymore. Even in good times, companies continue to shed tens of thousands of workers. Economic gurus argue that cutting labor costs has been a key factor in increasing profits and boosting stock prices.

But that's not always the case.

A University of North Carolina study found that many companies continue to fare poorly after downsizing. The study looked at 472 companies between 1986 and 1989. After weeding out firms with incomplete data or those that weren't public, it analyzed the financial results of 109 companies. On the whole, those firms did no better two years after downsizing than before they rolled out the chopping block. Performance didn't matter whether the company was cutting for structural and strategic reasons or just to cut the work force.

However, firms which cut only white collar jobs rather than blue collar jobs, did experience a financial boost.

And another study at the University of Wisconsin at Milwaukee paired up 34 companies in similar businesses in which one group enjoyed financial recovery and one group did not. While both groups laid off people, the firms that began rehiring and adding workers in the fifth and sixth year after the initial layoffs performed better while those that didn't add workers later on continued to fare poorly.

Bottom line: layoff announcements often boost the prices of many stocks because they are taken as a sign that management is serious about reducing costs and moving their companies forward. But some managers don't know what to do with their companies once they have gotten them thinner. So the next time some proud CEO proclaims she's cutting 5,000 jobs, make sure she has a real, long-term plan to bolster profits.

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