Ulrike Malmendier: Prosociality and Layoffs

Many managers describe layoffs as the hardest and most painful decisions of their careers; yet, standard economic models treat human and physical capital adjustments alike. We collect novel data on layoffs by U.S. public firms using NLP techniques, which allows us to establish several facts that are jointly hard to reconcile with existing models. First, firing decisions have large adverse healthof effects on CEOs, with distress-induced layoffs estimated to reduce CEO lifespan by 1.85 years. Second, CEOs become more reluctant to make layoffs over their tenure as they form more connections inside the firm. After plausibly-exogenous CEO changes, instead, new CEOs make more and shareholder value-increasing layoff decisions. Third, CEOs’ increasing reluctance to lay off employees intensifies when layoffs are more painful for employees, such as during recessions or the holiday season, or more painful for managers to witness, such as when they affect socially or geographically close employees. Fourth, the documented layoff reluctance is substantially more pronounced among CEOs with higher empathy-related traits. We also show that long-tenured CEOs are more likely to cut R&D spending during recessions, offsetting forgone savings from layoffs. Our results imply the need to adjust models of managerial decision-making for a “human” component of layoff avoidance. Prosocial, or empathy-related, motives provide a unifying explanation.