Why do stock prices rise when people get fired?
Yesterday, Zynga announced two things: better than expected earnings and a reduction of staff by 18%. The first is a good indicator for a business that has struggled since going public so it makes sense that stocks would rise. The second means that a lot of people are losing their job and it also is a harbinger that the stock prices will rise even further (as they did nicely in after-hours trading). Why is this the case?
For better or for worse, growth plans on Wall Street are bad for stocks. When companies are making purchases, investing in building departments, building new facilities, or announcing plans to hire people, investors get worried. At the end of the day, investors want to see growth, but they really want to see decreasing costs. They are most affected by bottom line profits rather than top line revenue and the processes needed to grow revenue such as hiring or acquiring often mean lower percentages on profits.
Wall Street is backwards when it comes to business decisions. A proper company strategy usually involves investing into people, technology, and infrastructure, but those high-cost items make investors worry. It makes them react in a punitive way which forces many companies to avoid good business decisions for the sake of good investment decisions.
Good news for a company is not always good news for investors. Bad news for a company is often good news to investors. Is this the business environment that we want operating in the world? Unfortunately, as backwards as it seems, the reality is this: investors react the way they do because the moves are normally righteous. In other words, it probably is a good thing for profitability of the company to reduce staff. Most acquisitions result in reduced returns. The model seems poor, but the concepts that drive them have been proven to work. Unfortunately.