The most recent version of my paper.

Abstract:

This study investigates the degree to which restructuring expense reveals systematic risk. Restructuring expense includes costs of employee termination and relocation, and therefore it provides information about when and to what degree the firm is reducing an important factor of production, labor. Firms reduce labor when they expect declines in demand for their products. If demand is expected to decline market-wide, labor needs will be lower across the overall economy. If an individual firm reduces its labor needs in concert with the overall market, this is indicative of the firm’s exposure to the expected aggregate demand shock and therefore undiversifiable risk. Following this logic, this paper measures firm sensitivity to aggregate demand shocks as the degree to which a firm’s restructuring expense coincides with declines in aggregate employment growth. Firms with higher levels of this restructuring-based measure of systematic risk have higher market betas as measured through conventional stock return-based measures. Further, these firms also appear to realize demand shocks after restructuring, as they have lower sales and operating expense growth, in conjunction with lower aggregate sales and GDP growth, after restructuring. These results highlight the informativeness of restructuring expense with respect to firm investments in human capital and exposure to systematic risk.