The impact of capacity-reduction initiatives on the stock market value of Chinese manufacturing firms

Capacity management is a focal theme in the operations management literature. Many studies have investigated the notion of appropriate capacity level and capacity expansion. However, the topic of capacity reduction has so far received little attention; thus, understandings of its implications for managers to initiate capacity-reduction projects remain limited. This study examines a sample of 173 capacity-reduction announcements from Chinese manufacturing firms to explore the effect of capacity reduction on firms’ stock market value. We capture negative abnormal changes in stock price after the announcement of capacity-reduction initiatives, which reflect investor concerns regarding the future cash flow of firms. We find that the negative effects are more salient when the capacity-reduction initiatives are mandated by the government and caused by demand shortages. Further, excess financial and operational slack can mitigate the negative effects. These findings have significant implications for manufacturing firms, the government, and investors.