Are employee decisions informative in the stock market? Evidence from employee downsizing in Japan

• Japanese firms are required to disclose both the expected and actual numbers of employees downsized, providing a unique opportunity to analyze employee decisions. • The difference between expected and actual downsizing numbers reflect employee decisions, which can imply private information about the firm's future outcome. • The stock market negatively reacts to both excess and shortfall downsizing announcements, indicating the market's sensitivity to deviations from expected downsizing targets. • Firms that report a shortfall in downsizing typically propose larger downsizing targets, suggesting a strategic approach by management to achieve desired downsizing levels. • The findings support the notion that employee decisions in downsizing processes convey private information to stock investors. This study investigates whether employee decisions on downsizing program applications convey private information in Japan. We find that the stock market reacts negatively to downsizing announcements with both substantial excess and shortfall outcomes. Additional analyses reveal that the negative market reactions for shortfall announcements are driven by those with a positive market reaction to initial announcement and that firms with a shortfall in downsizing initially propose larger downsizing targets. These findings suggest that employee decisions during downsizing processes convey private information to stock investors and that managers may strategically set higher downsizing expectations to meet a desired downsizing target.