I am an economist (or at least that’s how I earn a living). Your story is correct in some situations.
Investors don’t put money in companies to feel good about themselves, they put money in companies to make a return: profit. If they don’t make a return on their money in one investment they tend to move it elsewhere. If enough investors remove their money a company generally gooes out of business.
Some very basic (and overly simplified) economics (also basic accounting):
Profit = revenue - costs
Revenue = price * quantity of product sold
Costs = fixed costs + variable costs
Say we’re in an economic downturn and people stop buying as many of your company’s widgets as previously, on the basis of the very simplified equations above, there’s a few actions the company can take:
Accept lower profits: Investors can get pretty unhappy about that and may move their money elsewhere leading to a decrease in the value of your company. However, in a generalised recession, returns on most assets tend to decrease as well, so there may be nowhere for them to move their money to that earns more than what they are getting.
Increase prices: this can be pretty difficult to do (unless you’re a monopoly). Your costumers tend to move to your competitors or substitute other goods for what you sell (if you’re selling apples, they might start buying your competitor’s apples or even start buying pears if you push your price up). - I’m not going to get into a discussion of elasticities here.
Sell more: Sometimes companies react to sales drops by more aggressive marketing and sales. In some cases this can pick up lost revenue. However, despite what advertising companies may say, for the vast majority of products, advertising won’t do much if your product isn’t competitive or people aren’t buying.
Cut your fixed costs - Again, difficult to do. In the short term, by definition, fixed costs can’t be changed.
That pretty well leaves you with cutting variable costs. For most companies, labour is one of the largest variable costs. When a company starts going downhill, labour is therefore often one of the things it cuts back.
As I said, that’s a pretty simplified view. It can be complicated by a lot of things, including:
Financial markets tend to value companies on the present value of their future stream of profits (rather than their profit at any one point in time). Therefore, if the financial market believes that your company has a profitable future, they may downgrade its value more slowly.
Companies often have a few in-built buffers that allow them to ride out temporary bad patches -retained earnings etc. However, there’s only so much you can eat into these before investors see it as devaluing their investment.
As someone else mentioned above, hiring and firing is not a costless exercise. It costs money to lay people off and pay out their benefits. It also costs money to hire and train new people when an upturn arrives (economists tend to call these costs ‘transaction costs’). Companies will generally not fire people until the transactions costs are outweighed by the savings from averted wages.
Elasticities: Alright, I said I wasn’t going to mention it but I’ll try to do it in a non-jargonistic way: People react differently to changes in prices of different products. For some products, people underreact to changes in their price. For example, if the price of potatoes goes down by 50%, people don’t tend to hurry out and buy up big on potatoes (there’s only so many potatoes you can eat). For other products, people overreact to changes in their prices - if the price of Mercedes Benz cars went down by 50%, you’d probably see a greater than 50% increase in the sales of Mercedes Benz cars.
Ignoring competitors and costs for a second, this means that some companies (eg the sellers of Mercedes benz in the example above) can increase total revenue by dropping prices and selling more quantity, (remember revenue = price * quantity) similarly they could increase prices and sell a little bit less but still increase revenue. For other companies (eg potato sellers), these approaches would be disastrous.
Obviously this gets complicated when you start thinking about competitors as well. And I’m not even going to talk about Giffen Goods.
So, what does all this mean? In short: yes, some companies do tend to cut labour when sales are heading south. However, there are a few ameliorating factors and there are a few other strategies that they also follow.
Generally, cutting labour in a recession doesn’t mean that company managers are evil (economists don’t tend to think of companies in terms of morals) just that they are rational.
There are a lot of other things I could have added here but I wanted to keep it simple and I didn’t want to write a book. I’m sure others will be along to fill in the gaps.