The last case is GM in the USA. I fail to understand why does this happen. I understand that laying off jobs means higher dividend for the share holder and thus higher stock prices but in the long run is this a viable strategy, doesn't this mean lower income (and thus dividend) for the next quarter or year? Being that not only the employees are being fired but also that the factories are being closed it doesn't seem to me as a case of automation taking over the job. Can someone explain this to me? (I know that GM is allegedly cutting down the production of models non selling well, I am asking in general and not the specific case)

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    $\begingroup$ ΙI would suggest to change the title of the question to "Why firing employees appears to increase the share price of a company"? - This is an observed fact indeed, and can have some non-totally opinion-based answers. $\endgroup$ – Alecos Papadopoulos Dec 11 '18 at 22:58
  • $\begingroup$ The real question is: Does firing employees increase the pay of company executives? And the answer, unfortunately, is Yes, at least often enough to make it tempting. $\endgroup$ – Hot Licks Dec 12 '18 at 1:03

Is firing employees to raise stock prices a good strategy for a company?

For the range of scenarios whereby more productivity can be obtained from employees (units of workforce), it certainly is.

By opting for layoffs, a company seeks to get rid of redundant capacity and its associated costs, such as insurance, retirement pensions, or vacations. Since labor is the production factor which can be adjusted in the short-term, the benefit from cutting labor costs is reflected in the company's financial statements quicker than when the company envisions to sell its facilities, real estate, and equipment. Market agents are mindful of that difference, whence they foresee that the company's numbers are about (or are likelier) to improve.

That "strategy" (or, said more properly, tactic) starts to fail where the remaining workforce burns out and/or gets demoralized. These conditions are evidenced in accidents; production failures; product recalls; costs of litigation for unfair labor practices or faulty products; sickness; sudden resignations that cause bottlenecks; and when excessive layoffs render the company unable to meet the demand. It also fails when managers make their firing decisions influenced by personal motives (politics: favoritism, animosity) instead of business-minded criteria.


Your question is problematic. Let me restate it. Is firing an embezzler bad for a company? Or, is firing your lead producer bad for a company? The firing OR hiring of workers has no directional implication for the stock price without other information.

General Motors is trying to avoid six billion dollars in costs, a quarter of which are tariffs. The USMCA changed some of the rules, effectively putting a sales tax on a wide variety of domestically made cars. In particular, they required that 75% of the materials were made in North America versus 62.5% under NAFTA. That meant that even if a car was 70% made in the US, it was now a foreign car for tariff purposes if nothing came from Canada or Mexico. The old NAFTA requirements made quite a few cars viable that would not be viable otherwise.

Tariffs would be 25% of the price of those vehicles, the profit margin on new cars is very thin. GM has been trying to spin this to be about changing consumer sentiment, but really it is about cost changes created by a new change in the rules. People would like to see a retooling of those plants, but that is unlikely. The tariff regime is unstable. Without knowing the rules of the road, would you spend billions of dollars on a plant that would need to run for thirty or forty years to be viable, when the rules could wipe out its value tomorrow?

GM's choice was very rational. If the tariffs were gone and NAFTA back in place, then those plants would likely still be open as you would not need to avoid an added 1.5 billion dollars in added costs from tariffs alone. That would have been corporate profit, or at least a reduction in losses if there were any.

You are correct in your idea that corporate revenues will fall. In fact, corporate profit will fall when compared to prior years, but it will fall less than would happen if they kept them open.


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