Tough news tends to come in waves. In the case of layoff announcements, it appears to arrive in packs. Julian Kolev, SMU Cox strategy professor, and his co-researcher discover that when one large firm announces layoffs, it triggers an avalanche of other firms within the industry doing the same thing. “We show this is a cause-and-effect relationship: other firms are following,” Kolev says. “It’s not based on big news like a hurricane or other type of crisis like a terrorist attack. It really is a leader-follower situation.”

In the study, Fortune 500 firms are more likely to time their layoff announcements in the days right after negative economic news is released, like the aftermath of a layoff announcement by a very large firm. In terms of financial markets, the reputation penalty of layoffs is lower immediately after negative signals about the state of the economy, meaning the stock price takes less of a hit.

In the study’s sample of Fortune 500s from 1970 to 2010, the authors find significant evidence for excess clustering in layoff announcements. This clustering behavior is observed only in publicly traded firms, and not in comparable private firms. The size of these clusters ranges from within a day to over two weeks, which is evidence of what the authors consider “excess clustering.”

The authors find that an announcement from one of the 20 largest firms, based on the previous year’s revenue, is associated with future layoffs by other Fortune 500 firms. The effect is twice as strong if the large firm is in the same industry as the “follower firm,” likely to be managed by a short-tenured CEO and has a greater reliance on equity-linked compensation for its CEO. Thus, reputation management is an important driver for the timing of layoff announcements at high frequencies.

Analyst coverage is also a factor. Kolev says, “Firms that have many analysts covering them do not engage in the follower behavior because they are already watched by market players.” Firms lacking analyst coverage tend to be the followers.

Does this day-to-day firm behavior impact larger, broader shifts in labor policy? A connection was made between high-frequency clustering and layoff behavior over the business cycle. “Firms that engage in following behavior are also mainly laying off workers during recessions,” says Kolev. “We are not saying there are too many layoffs. We recognize there is going to be creative destruction and displacement of workers in the economy.” Firms are shifting workers based on strategy and industry conditions. “However, if we did not have these financial reputation considerations, that stream of layoffs might be much smoother,” he offers, “[rather than] so many people being laid off in a single week.”

Reputation management in financial markets may strongly impact the real decisions of firms, particularly with respect to labor decisions, the authors write. Bottom line: Managers’ behavior and corporate governance not only impact the firm and its industry, but also influence the broader labor market and, by extension, the economy.