Big Job Cuts Mean Short-Term Gain, Long-Term Pain for Shareholders

Big Job Cuts Mean Short-Term Gain, Long-Term Pain for Shareholders, Study Finds

Posted May 05, 2010 02:47pm EDT by Heesun Wee in Investing, Recession

Related: ^DJI, ^GSPC, ^IXIC, AAPL, S, JPM, F

New research from the Univ. of Colorado, Denver shows major job cuts don't guarantee prosperity down the line but, in fact, lead to lower profits and stock returns.

"Those who cut deepest, relative to industry peers, delivered smaller profits and weaker stock returns for as long as nine years after a recession," theWSJ reports, citing a study by Univ. of Colorado business professor Wayne Cascio. He studied how companies in the Standard & Poor's 500-stock index have performed during and after recessions over an 18 year period.

Why?

Turns out firms that cut aggressively aren't prepared to ramp up quickly once the recovery begins. In contrast, peer firms that cautiously trimmed are well-staffed to take advantage of a swift shift in momentum. "You can't shrink your way into prosperity," says Cascio in the article.

This study is interesting fodder, when American unemployment hovers at 9.7 percent, and firms had cut aggressively and more quickly than during previous recessions. (Wednesday morning: The private sector added jobs in April -- marking the first gains since 2008, according to the ADP report. The market now will focus on the government's monthly jobs report due Friday.)

Wall Street's short-term, quarter mentality

As Aaron and Henry discuss in the accompanying segment, the high expectation of posting consistent quarterly profit growth has made too many managers short-sighted. They're quick to slash jobs to make quarterly numbers and appease shareholders, when most businesses indeed are cyclical with ebbs and flows of growth and lean periods.

While deep jobs cuts appear to have helped firms including Ford, others are struggling including Sprint, as explored in the WSJ article. Click herefor a closer look at the companies studied.

The classic children's tale of the ant and the grasshopper applies here. In the fable, the grasshopper is rebuked for idleness during the warm months as industrious ants prepare for the cold, offering a moral lesson about hard work and preparation.

It's a lesson familiar to some business leaders including Apple's Steve Jobs and JPMorgan's Jamie Dimon. Jobs has said too steep cuts hurt the company. And Dimon famously said, "As president of a company, [I]prepare for the worst and hope for the best."

http://finance.yahoo.com/tech-ticker/big-job-cuts-mean-short-term-gain-long-term-pain-for-shareholders-study-finds-478944.html?tickers=^dji,^gspc,^ixic,aapl,s,jpm,F