Who Initiates Layoffs and Affects Firm Performance? Conflict of Interests between Active Foreign Institutional Investors and Outside Directors

Abstract

Expanding upon the existing literature on agency theory, which often overlooks potential conflicting interests among monitoring mechanisms, this study investigates the divergent effects of active foreign institutional investors and outside directors on firm strategy and performance. Specifically, in light of inconclusive findings on the relationship between layoffs and performance, this study examines the initiators of layoffs and their impact on firm performance, comparing the roles of active foreign institutional investors and outside directors. Through panel data analysis of 2,516 firm-year observations from South Korea spanning 2010 to 2014, the findings reveal that firms with active foreign institutional investors are more inclined to implement large-scale layoffs, which positively moderate the relationship between active foreign institutional investors and firm performance metrics such as return on assets (ROA) and market returns. However, the relationships between active foreign institutional investors, layoffs, and performance are contingent upon the presence of outside directors on the board. Outside directors are not actively involved in initiating layoffs but tend to approve them in the context of operational performance, such as ROA, while showing less interest in layoffs as a means of external evaluation, such as market returns. These findings highlight the heterogeneous characteristics of outside directors and active foreign institutional investors with regard to layoffs and performance, and subsequently propose theoretical and managerial implications for the design of corporate governance.

Received: 13 February 2023 / Accepted: 19 April 2023 / Published: 5 May 2023