Academic Wayne Mascio Confirms My Proprietary Research Findings

Back in early May, the Wall Street Journal published an article entitled Recalculating the Costs of Big Layoffs.

In the piece, a business professor named Wayne Mascio, from the University of Colorado, was quoted as saying,

"You can't shrink your way to prosperity."

Why didn't I think of that?

Wait, I did! In 1996! And published a piece shortly thereafter in Directorship, a magazine for board members. Then I applied the proprietary results in consulting and equity portfolio management applications.

The Journal article goes on to say that Mascio,

"has studied how companies in the Standard & Poor's 500-stock index have performed over 18 years. His conclusion: those who cut deepest relative to industry peers, delivered smaller profits and weaker stock returns for as long as nine years after a recession."

Well, that's nice, but there are so many caveats in the statement as to make it virtually useless for pragmatic management action.

There's another quote that speaks to a nuance regarding layoffs,

"Companies that used the recession to weed out weaker performers and trim bloated bureaucracies will fare better than companies that slashed across the board, analysts say."

Probably true, but how would the analysts know? From my own research experience, that's an extremely difficult type of data element to reliably recover from primary sources.

However, Mascio's work has other significant problems and flaws.

For example, why dwell on a recession? Not every company faces similar market responses in a recession. So measuring based on the admittedly-flexible recognition of a recession's beginning and end will leave the resulting research comparing business performances which aren't necessarily comparable.

For my own work on this type of phenomenon, I took a much simpler approach. Among several basic patterns of performance, I studied companies whose performances had fallen precipitously, with multiple years of bad total returns, then recovered. This not only allowed me to isolate the particular performance pattern, irrespective of the general economy, but also to estimate probabilities of companies successfully returning to consistently superior performances.

Mascio's use of "industry peers" presents problems, as well. In many sectors, competitors are divisions of conglomerates. In those cases, you can't take the top-line profits or total returns of the company and assign them to a particular division. So the ability to use what I believe to be the best metric of business performance, total returns over multiple years, is unavailable.

Many years ago, I was taught by Jerry Wind, a marketing professor at the University of Pennsylvania, that useful research must take account of a myriad of details at the design stage. The availability and reliability of data are paramount, and fudging them will result in unreliable conclusions.

In this case, Mascio's conclusions, as reported by the Journal article, are likely directionally correct. But there's no ability to assign probabilistic confidence levels, or even really compare such results across companies, given the various constraints which, according to the piece, were built into his research.