For the people involved, layoffs are invariably tragic. But investors tend to view layoffs differently. Depending on investors' expectations, news of workforce cuts can send a company's stock up or down. If a seemingly solid company surprises Wall Street with a big, unexpected layoff, investors may begin to worry. But if a company many people thought needed to trim its costs announces a layoff, those same investors may cheer.

Layoffs can be more complicated than that, though. Compare a company shedding workers to a body losing weight. A company may be praised for downsizing, but if it's cutting muscle instead of fat, it may end up with a diminished capacity to grow and prosper.

Microsoft (NASDAQ:MSFT), for example, recently announced a 5,000-worker layoff, amounting to 5% of its base. This is the company's first big downsizing, and it includes cuts across the board, including in the research and development, marketing, sales, and administrative areas. Investors might want to consider how much cutbacks in those areas could hurt profitability. After all, research and development is often an incubator for future revenue sources.

Microsoft isn't alone. Companies from Pfizer (NYSE:PFE) to Boeing (NYSE:BA) have also announced sizable reductions in force.

Other ways to think about layoffs

  • Short-term vs. long-term. For instance, is Caterpillar's (NYSE:CAT) massive layoff a long-term fix to a short-term problem? Will it be able to ramp up again quickly when the economy rebounds? Will its current operations suffer now, as it deals with layoffs? Were there other, better alternative solutions?
  • Productivity. A downsizing could end up leaving a company more profitable, if it ends up being more productive with its remaining employees.
  • Employee morale. Does management have the confidence of its remaining workers? Reports of poor morale from employees of Sprint Nextel (NYSE:S) and Advanced Micro Devices (NYSE:AMD) could presage higher employee turnover, inviting significant expenses to hire and train replacement workers.

Wharton Business School professor Peter Cappelli has noted that "virtually all studies show a decline in performance associated with layoffs" -- though he also conceded that downsizing companies are, by default, already troubled. The bottom line for investors? Layoffs are rarely all good or all bad; the truth often lies somewhere in between. 

Further fully employed Foolishness:

Longtime Fool contributor Selena Maranjian owns shares of Microsoft. Pfizer is a Motley Fool Income Investor pick. Sprint Nextel, Pfizer, and Microsoft are Motley Fool Inside Value picks. The Fool owns shares of Pfizer. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.