Hire During Slump, Profit Two Years Later

Hire During Slump, Profit Two Years Later

"By going against the grain and hiring a few key people during a downturn, companies often obtain higher quality talent at a bargain price," said lead researcher Charles R. Greer, associate dean for graduate programs in the Neeley School of Business at Texas Christian University.

"This is the first empirical study to show that, using the contrarian financial investment strategy of going against the herd and hiring a few key personnel during a downturn, results in stronger financial performance two years later. At the same time, we found that those companies less willing to incur the risk of investing in their human resources during economic downturns achieved lower financial returns after the downturn."

The study was conducted by Greer, Timothy C. Ireland, professor of management at Oklahoma State University, and John R. Wingender, chair of the Department of Economics and Finance at Creighton University. The researchers looked at data from companies from different industries and examined monthly common stock returns. "We found that shareholder returns were higher in the firms that reported more extensive hiring during downturns," Greer said. "Companies that employ this strategy obviously view their workforces as potential investment opportunities that will yield future returns. In contrast, most companies lay off during downturns in an attempt to cut costs. It is obviously difficult for companies to hire even a small number of people when revenues are down, the competition is laying off, and the organization does not view employees as assets or resources."

"Anytime you invest in people, there is a higher risk than investing in products or other physical resources. For one thing, they may leave your company when times get better. Another issue is the length of the downturn and the cost of underutilizing people. If the downturn continues for a great length of time the company's return on its investment may be negative. There is no question that there is a risk in investing in an uncertain future, but our evidence clearly indicates that there are some firms that do it and benefit significantly a few years later."

In companies employing this hiring strategy, the researchers examined financial performance both one and two years after the economic downturn ended.

"We found stronger positive results two years later," Greer said. "It took two years for the practice to be fully reflected in the performance of the organization. Our evidence supports the notion that more time may be needed to realize the full financial impact of the strategy. Furthermore, companies that pursue the practice typically pursue other high performance human resource practices that contribute to shareholder returns."

Greer, who has been studying contrarian-hiring strategy in companies for almost 20 years, said another major finding of the study was that some companies used it to help meet Affirmative Action goals.

"They found it was a good time to hire minorities and women," he said. "Meeting Affirmative Action goals was the reason some engaged in hiring during a downturn. Those companies employing the strategy for this reason showed enhanced financial performance later on."

According to Greer, a previous article by William Bright recommended that companies make such investments during economic downturns but there was no empirical investigation of the consequences.

"Our study suggests that companies should seek out some of those bargains that are available during downturns, whether they are experienced managers or inexperienced employees just coming into the job market from universities. By employing this strategy, companies get the pick of the litter, and, as our evidence indicates, improved financial performance."

For more information contact: Charles R. Greer at 817-257-7537 or at [email protected].

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