Performance Below Aspirations and Employee Layoffs: The Role of Regional Characteristics

How do firms lay off employees when their performance falls below the level of aspirations? Although firms have been recognized to have close interrelationship with stakeholders in the regional environment, how characteristics of the regional environment influence layoff decisions of firms facing negative performance feedback has not been systematically examined. In this study, we assume that negative performance feedback triggers two motivations in firms with dissimilar time horizons—one motivation with a short-term time horizon to cut down operational costs and quickly improve financial performance, and the other motivation with a long-term horizon to take adverse responses from the regional residents into consideration prior to cutting down operational costs. Under the assumption, we theorize that when faced with negative performance feedback, firms lay off more employees in regions where ethnic diversity, litigious tendency of the residents, and size of layoffs by other firms in the regions are greater. With our data on 126 firms whose business facilities were distributed across different states in the US between 2011 and 2020, we find results that support the predictions. With these findings, we provide novel implications for scholars and practitioners on the impact of regional characteristics on firms’ learning from performance feedback and the role of time horizon in restructuring organizations.