Just curious on this. Is up or down motion more common after that kind of thing?
Need answer fast.
It depends. Cost cutting can be beneficial in the short term, but have serious long term impacts for the company’s prospects, especially if that company is in the business of R&D.
eta: I don’t think there’s a definite answer-- to succinctly address your question-- the nature of the cost cuts, the nature of the market on that particular trading day, and the long term prospects for the company are all factors.
Let’s say benefit (but not wage) cuts, incentive raise prospects left fully intact, a decrease in travel expense budgets and a company with overall great prospects, and customers in a failure-proof industry.
FTR, don’t actually need answer fast.
That was for humor value.
There is no universal answer, but *generally *cost-cutting = more profits = higher stock price.
Cost-cutting is generally not done until things are already bad. Few companies cut costs when they’re already meeting their projections. You cut costs when you’re in trouble. Over the long term it might turn out to be good for the company if you can bring in the same or more revenue at less cost, but in the short term it’s a indicator of bad things to come. Sell.
Generally layoffs cause the stock price to go up. This is always painful for the laid off.
Cost cutting is a 100% short-term benefit for the company. So in a neutral to soft economy the share price usually climbs in the short term (days), since that price is driven almost exclusively by traders, not holders, of the equity.
Cost cutting can be either good or bad for the long term prospects of the company. It depends on whether the market believes the management is ahead of the game, or is belatedly reacting to an adverse business situation. In the former case, the share price will tend to be steady or rising in the medium term (months) at least compared to its peers. In the latter case, the price will probably get hammered relative to its peers, again measured over a period of months.
Note that if the peer group is suffering too, then absolute drops may really be relative gains.
E.g. you may see your price fall by 5% in the 6 weeks after a cost-cut is announced. But if all your peer companies are down 10% in the same period, you will realize that the cost-cut was treated as good news by the market, or at least as less-bad news than your peers were putting out at the same time.
Finally, the market hates surprises. So if a strong company in a generally successful economy suddenly announces a non-trivial cut, the market gets spooked. In investing, bad surprises outnumber good ones 10 or 20 to one. And we all know managements try very hard to amplify good news & bury bad. So any hint of adversity leaking out is treated as a sign of much worse yet to leak out. And then a very rapid panic sell will pound the price down for a day or two.
It also depends on the reason for the cut. If a corporate raider takes the company private and announces a 10% pay cut & reduced bennies for all, the market treats that as excellent news since all that extra money will go to the shareholders. OTOH, if the company was not bought and management just annouces they’re laying off 1/4 of their sales force for the same dollar savings as the raider announced, well that’ll be treated as disastrous news since it will adversely impact sales going forward.