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Employee downsizing and organizational performance: What do we know?

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Employee downsizing – the phenomenon Globalization and rapidly changing industry conditions over the past couple of decades have dramatically increased the competitive pressures faced by most corporations. To stay ahead in this more competitive environment, firms are being forced to constantly reevaluate their current strategy. Often this entails a reexamination of existing cost structures and the exploration of efficiency enhancing options. In this context, it should come as no surprise that employee downsizing has become an integral part of organizational life in corporate America. While downsizing is not a new phenomenon, it was only during the major economic downturn in the early 1980s that we started to see high levels of employee reductions for reasons other than job performance. Prior to that, such reductions were often temporary, with employees laid off during downturns being recalled when business conditions improved. More recently, firms have often engaged in employee downsizing of a more permanent nature. Radical restructurings undertaken in response to increased, often foreign, competition and the desire on the part of firms to drastically reduce payroll costs have often meant plant closures and permanent layoffs. Indeed, employee downsizing has emerged as an important weapon in the arsenal of many managers seeking enhanced efficiency and improved firm performance. As Datta, Guthrie, Basuil, and Pandey (2010, p. 282) suggest, “given its magnitude and impact, employee downsizing can legitimately be viewed as one of the most far reaching and significant management issues of the current era.” Very importantly, what used to be a primarily US practice has now become a global phenomenon with large-scale layoffs becoming commonplace in European and Asian corporations.

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... Downsizing refers to a "planned set of organizational policies and practices aimed at workforce reduction with the goal of improving firm performance" and has emerged as an integral element of organizational life (Datta et al., 2010, p. 282). An inherent assumption in the downsizing decision is that firms aim to maximize operational efficiency by reducing costs, and thus choose to downsize as an effort to decrease labour related costs (Datta et al., 2012). Both practitioners and scholars are keen to examine how employee downsizing affects organizational financial performance (Guthrie and Datta, 2008;Vermeulen, 2009;Chhinzer and Ghatehorde, 2010). ...
... Our choices are grounded in the RBV with the firm as well as economic theory, as previously discussed. Asset turnover, profit margin, ROA and ROE are widely used as financial measures in accounting and downsizing literature (Datta et al., 2012). Asset turnover is determined by calculating sales divided by the average total assets (current and past year) of an organization. ...
... We also include the aggregate level analysis in the final columns. Datta et al. (2012) suggest that the mixed findings on the relationship between downsizing and organizational financial performance indicate that the appropriateness of downsizing may be contextually dependent. They indicate that research regarding contextual factors is rather limited; suggesting that models to improve our understanding of performance implications of downsizing would provide interesting insights. ...
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Purpose – The purpose of this paper is to suggest that divergent financial performance triggers different rationales for the decision to downsize (excuses, justifications, apologies or denials) and that organizational financial performance post-downsizing varies based on the initial downsizing rationale. Design/methodology/approach – A mixed methods approach paired content analysis of 178 downsizing announcements from 2005 to 2011 with organizational financial data pre and post-downsizing event. Paired sample t -tests determined mean differences in organizational financial performance pre- and post-downsizing based on six commonly used organizational performance measures (accounting and human resources metrics). Longitudinal performance trends were evaluated using event history analysis. Findings – Organizational experiencing both financial growth and decline engage in downsizing, but organizational financial performance varies based on downsizing rationale. For example, organizations engaging in excuse-based downsizing experienced significant levels of volatility and decline pre-downsizing, but growth post-downsizing. However, organizations engaging in justification-based downsizing experienced financial decline pre-downsizing, but no significant additional decline post-downsizing. Research limitations/implications – Collection of information over multiple business or economic cycles, or categorizing organizations based on industry, organizations size or number of employees may provide additional information on the relationship between downsizing and organizational financial performance. Practical implications – Organizational performance pre- and post-downsizing varies based on downsizing rationale. Additionally, metrics used to evaluate downsizing success or failure should be considered carefully. Originality/value – The authors help explain divergent results in existing research on the relationship between downsizing and organizational financial performance by identifying downsizing as a multi-dimensional event. The study indicates that organizational experience both financial growth and decline engage in downsizing, but rationalize the downsizing differently (according to social accounts).
... Performance outcomes of employee downsizing has generally been studied in three different research areas. These three areas are the market response, profitability, and productivity (Datta, Basuil, & Radeva, 2012). In general, the results from the first two areas of research indicate that, rather than increasing shareholder value, and profitability, downsizing actually lowers market-to-book values and most profitability measures (Datta et al., 2012). ...
... These three areas are the market response, profitability, and productivity (Datta, Basuil, & Radeva, 2012). In general, the results from the first two areas of research indicate that, rather than increasing shareholder value, and profitability, downsizing actually lowers market-to-book values and most profitability measures (Datta et al., 2012). The third area of research did find that, if downsizing was perceived fair, productivity measures would improve when compared to downsizing, which is perceived as unfair. ...
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Burnout is a prevalent problem in advanced market economies, and recent economic downturns have created conditions that increase the likelihood of burnout within organizations. This present paper addresses the current absence of research in the scientific literature on how macro‐level factors may affect burnout. We propose a conceptual model of burnout, which introduces the macro environment, organization behaviors, and both individual and organizational stressors that all contribute to burnout. Furthermore, we review the burnout literature and provide a multilevel preventive approach for dealing with burnout. Trends and previous findings in the literature support the proposed conceptual model.
... Palmon et al., 1997;Nixon et al., 2004). Because of the importance of downsizing as a strategic activity, understanding the performance consequences of downsizing has been a major concern of management researchers (see Datta et al., 2010Datta et al., , 2012 for an overview). ...
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... Their findings suggest that survivors perceive unfair treatment and often react with lowered motivation and effort. Other research shows that employee reactions are not universal and the influence of layoffs on company performance is therefore uncertain (Schenkel & Teigland, 2017; for reviews, see Datta et al., 2010;Datta, Basuil, & Radeva, 2012). Such differences in survivor performance have been associated with different contexts or employment systems (Luan, Tien, & Chi, 2013). ...
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We investigate the effect of employment systems on the layoff‐performance relationship. We construct a typology of two types of HPWS (Calculative or “hard” HRM and Collaborative or “soft” HRM) and two non‐high performance systems (Traditional HRM and Low HRM). We use attribution theory as a framework from which to draw hypotheses. We examine survey responses from two waves of panel data. We employ cluster analysis to identify distinctive configurations of employment practices used in UK workplaces. We use the cluster outcomes as explanatory variables in moderator regression analysis. Following layoffs, we find that Calculative workplaces experience lower subsequent performance than Collaborative workplaces. Over the next five years, Calculative and Collaborative workplaces experience equivalent amounts of performance change but Calculative workplaces fail to make a full recovery.
... Palmon et al., 1997;Nixon et al., 2004). Because of the importance of downsizing as a strategic activity, understanding the performance consequences of downsizing has been a major concern of management researchers (see Datta et al., 2010Datta et al., , 2012 for an overview). ...
... Each category experiences different effects of downsizing (Gandolfi, 2008). It has been reported that the human costs of downsizing are immense (Burke & Greenglass, 2000) and far-reaching (Brockner, Greenberg, & Grover, 1988;Datta, et al., 2010;Datta, Basuil & Radeva, 2012). In fact, survivors frequently suffer from "survivor syndrome" (Littler, 1998) and, as a result of having limited resources and support following downsizing (Gandolfi et al., 2012), experience profound personal and professional consequences (Macky, 2004). ...
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This paper investigates the performance effects of major job cuts.1 1 Like Wayhan and Werner (2000), we interchangeably use the expressions ‘workforce reduction’ and ‘job cuts’ instead of the broad concept of ‘downsizing’ which is subject to multiple confusing definitions (DeWitt, 1998). View all notes Using data from Compustat S&P database, we examined the longitudinal impact of workforce reductions on labour productivity and operational indebtedness of 239 US and Canadian companies. Repeated measures analysis showed that firms that substantially cut jobs failed to improve their labour productivity and their operational indebtedness. Then, taken a step further, statistical analysis surprisingly revealed that firms that cut the highest proportions of their workforce had a significant deterioration of their operational indebtedness and a non-significant change of their labour productivity. These results call into question the economic legitimacy of major workforce reductions increasingly institutionalized to the detriment of the strategic approach of HRM.
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We drew from the literature on positive organizational behaviour (Luthans & Youssef, 2007) to test a process model relating generalized optimism (Carver & Scheier, 1999) to the cognitions, affect, and behaviour of 237 Canadian federal government managers during and following a major organizational downsizing. Our data supported a model in which generalized optimism measured 18 months prior to the downsizing (T1) associated positively with managers' cognitions, attitudes, job performance, and self-reported coping effectiveness measured 12 monthspostdownsizing (T3). Analyses suggested that some of these associations were partially mediated by a positive thinking coping strategy and expectations for future career and job success reported during the downsizing (T2). We advocate for more research that draws from the positive organizational behaviour literature to study the effects of downsizing on survivors.
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Research has found that downsizing is not generally followed by improved organizational performance. Using a sample of hospitals that recently downsized, we evaluate the effects on performance of the human resource management (HRM) practices used in layoffs. Strategic HRM theory suggests that practices can have an impact on performance outcomes. We find that showing consideration for employees' morale and welfare during downsizing is positively related both to perceived success of downsizing and to financial performance following layoffs. Advance notice of layoffs is positively related to subsequent financial performance, but the provision of extended insurance to laid-off employees is negatively related to financial performance. Planned redesign of work structures is positively related to perceived success, but has neutral to negative effects on financial performance. Copyright © 2004 John Wiley & Sons, Ltd.
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We conceptualize downsizing as an attempt to reduce organizational slack. We suggest that the degree to which downsizing will improve firm performance will be contingent on conditions under which the downsizing occurs. We emphasize the level of organizational slack as an important contingency, and also examine two other contingencies: (1) whether the scope of the downsizing is narrow (restricted to personnel reductions) or broad (involves organizational redesign); and (2) if the downsizing is conducted proactively (when performance is stable or improving) or reactively (when performance is declining). By analyzing a panel dataset of downsizings conducted by the 100 largest American industrial firms from 1977 to 1993, we find broad support for our hypotheses that downsizings are more likely to lead to improved performance when firms have high slack, when their scope of the downsizing is broad, and when the downsizing is done proactively. We also explore and find evidence for interactions among these contingencies. We discuss the implications of our findings for the literatures on downsizing and organizational slack. In doing so, we bring together two literatures that have an obvious affinity but have been only loosely coupled in the past. Copyright © 2005 John Wiley & Sons, Ltd.
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This study examines the effects of downsizing actions and implementation strategies on market performance. While downsizing actions reduce costs, they also produce a loss of valuable human capital that can exceed the benefits resulting from the lay-offs. In support of this argument, the results showed that downsizing had a negative effect on market returns and the effects grow increasingly negative with larger downsizing actions. However, the market reacts more positively to downsizing actions when reallocation strategies are used and to large downsizing actions when disengagement incentives are applied. The results of this research suggest the importance of carefully managing valuable resources to create positive returns. Copyright © 2004 John Wiley & Sons, Ltd.
Article
Although workforce reduction has remained popular among organizations throughout the 1990s, few largescale studies of the impact of employee cutbacks have been conducted in Canada at the establishment level. About 55% of establishments reported reducing their workforce over a 2-year period, with an average reduction of almost 16% of the workforce. When comparing establishments that had and had not engaged in permanent employee cutbacks, the results indicated that workplaces experiencing downsizing were more likely to have lower scores on the employer efficiency and employee satisfaction measures and report less favourable employer-employee relations. Further analysis limited only to establishments experiencing workforce reduction revealed that a high-involvement workplace strategy was associated with significantly better performance outcomes.RésuméBien que la réduction des effectifs soit restée courante dans les entreprises tout au long des années 90, on a réalisé peu d'études à grande échelle traitant de l'impact de ces compressions sur les entreprises au Canada. À peu près 55 % des entreprises ont signalé une réduction moyenne de presque 16 % de leur personnel sur une période de deux ans. En comparant ces établissementslà à ceux qui n'ont pas effectué de compression de leur personnel permanent, les résultats indiquent que, par suite de compressions, les établissements sont davantage susceptibles d'assister non seulement à une diminution de l'efficacité de l'employeur et de la satisfaction des employés, mais également de la qualité des relations employeur-employés. Une autre analyse, qui se limite à des établissements ayant fait l'expérience d'une réduction des effectifs, a révélé qu'une stratégie de grande participation en milieu de travail était associée à une sensible amélioration des résultats.
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It is often argued that mergers and acquisitions (M&As) lead to employee layoffs. This paper examines factors that influence the probability that a layoff announcement will follow an M&A. A sample of 136 large M&As, involving U.S. targets, that occurred between 1989 and 1993 is analyzed. Analyses of this sample indicate that the probability of a layoff announcement is higher if the firms involved in the transaction are related. The probability that a layoff will be announced was not changed when the acquirer was a non-U.S. firm (cross-border transactions). Target revenue per employee before the M&A is negatively related to the probability that a layoff was announced. Target financial performance prior to the transaction and use of borrowed funds to finance the merger were not found to have an impact on the probability that a layoff will be announced. © 1998 John Wiley & Sons, Ltd.
Article
Downsizing and layoffs are an important mechanism for U.S. firms to cope with their strategic and economic environment. In contrast, the Japanese tradition of lifetime employment limits the ability of firms to employ layoffs as a strategic measure, relegating its use to conditions of financial distress. This paper provides the first comparison of layoffs in Japan and the United States and examines stock price reactions to layoff announcements in each country from 1990 to 1994. Agency theory and Aoki's cooperative game theory are employed to discuss differences in the governance structures of U.S. and Japanese firms and their implication for stock price reactions. Results show that layoff announcements trigger negative returns for both U.S. and Japanese firms. Specifically, layoff announcements of U.S. firms are associated with a negative 1.78 percent abnormal return, while layoff announcements for Japanese firms are associated with a negative 0.56 percent abnormal return. To better understand the impact of layoffs, this study examines the relationships between stock price reactions and various layoff characteristics (such as whether the layoff is proactive or reactive or whether the layoff is the first in the industry). Implications of the findings are discussed. © 1997 John Wiley & Sons, Ltd.
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We used a longitudinal design to examine the predictors of early career research productivity for 152 management professors over the first six years of their career. Results revealed early career research productivity to be a function of dissertation advisor research productivity, pre-appointment research productivity, and the research output of a faculty member's academic origin and academic placement. However, the effects of these predictors varied over time in terms of strength. The findings are discussed in terms of guiding the evaluation and hiring of new researchers in knowledge-based industries. Copyright © 2003 John Wiley & Sons, Ltd.
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This article examines the relation between stock returns and a set of operating decisions: layoffs, operation closings, and pay cuts. We find evidence that cost-cutting measures occur after significant stock price declines. Announcements of layoffs and temporary operation closings are associated with negative returns, while permanent operation closings do not have significant announcement effects.
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This paper documents the restructuring of 92 Japanese corporations that experienced a substantial decline in operating performance between 1986 and 1990. These firms implement a number of downsizing measures such as asset sales, plant closures, and employee layoffs. Firms also expand and diversify, and often restructure their internal operations. Compared to US firms with a similar decline in performance, however, Japanese firms are less likely to downsize, and layoffs affect a smaller fraction of their workforce. The frequency of asset downsizing and layoffs in Japanese firms increases with the ownership by the firm's main bank and other blockholders. Blockholders also increase the probability of management turnover, outside director removals and outside director additions, but decrease the likelihood of acquisitions. We document improvements in operating performance following downsizing actions in Japan.
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We examine the relation between layoffs and stockholders' wealth, and corporate performance subsequent to layoffs. We find that layoffs are preceded by a period of poor stock market and earnings performance, and are followed by significant improvements in both. On average, layoff announcements are associated with a significantly negative stock market response, with the lowest returns associated with layoffs attributed to declining demand. We do not find any evidence that layoff announcements are followed by reduced total employment in the subsequent 3 years; however, we find evidence of improving profit margins and improved labor productivity following layoffs. We find no evidence that the eventual turnaround in firm performance following layoff decisions is due to mean reversion in accounting earnings. Finally, we find that layoff firms tend to increase corporate focus. Our findings support the view that a layoff decision is a rational response to ensure corporate survival.
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We examine the response of stock returns to corporate layoff announcements for the 12-year period from 1981 to 1992. The results indicate a dramatic shift in the investors' perception of initiatives to reduce the number of employees. While there were negative abnormal returns associated with the announcements during the recessionary and boom periods of the 1980s, there are positive abnormal returns associated with the announcements in the early 1990s. This evidence suggests that important structural changes in the U.S. labor market may be underway.
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Bank layoffs have increased in recent years as a means of reducing operating expenses. To the extent that bank layoffs signal information about other banks, intra-industry effects should occur. Our objective is to determine whether intra-industry effects exist, and to explain the variation in intra-industry effects following bank layoff announcements. Our analysis shows positive and significant intra-industry effects, which are interpreted as negative information for the announcing bank, as competitors may be able to gain market share. The intra-industry effects are more favorable when the banks announcing layoffs are in the same region as rival banks, and when banking industry earnings are relatively high.
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This study develops a theoretical framework that integrates institutional and network perspectives on the form and consequences of administrative innovations. Hypotheses are tested with survey and archival data on the implementation of total quality management (TQM) programs and the consequences for organizational efficiency and legitimacy in a sample of over 2,700 U.S. hospitals. The results show that early adopters customize TQM practices for efficiency gains, while later adopters gain legitimacy from adopting the normative form of TQM programs. The findings suggest that institutional factors moderate the role of network membership in affecting the form of administrative innovations adopted and provide strong evidence for the importance of institutional factors in determining how innovations are defined and implemented. We discuss implications for theory and research on institutional processes and network effects and for the literatures on innovation adoption and total quality management.
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Many management fads have been shown to be detrimental to the well-being of employees as well as to the long-term competitiveness of organizations. Downsizing has been recognized as belonging to this category and research has begun to clarify what is now commonly known as ‘survivor syndrome’, the negative attitudes and behaviours of those that survive retrenchment. However, recent evidence shows that ‘survivor syndrome’ does not actually exist in all downsizing situations. By closely examining the specific conditions under which the effects of downsizing are lessened, this study contributes to the development of effective interventions for dealing with organizational change. Using the data from a longitudinal survey, this paper investigates the impact of downsizing on survivor attitudes of affective and continuance commitment, general and specific job satisfaction, perceived organizational support, and the behaviours of performance, effort, turnover intention and absenteeism. While analyses reveal evidence of decline in some of the variables after the downsizing, a more important finding was support for the counter-argument that a syndrome does not actually exist. Four of the variables were not significantly affected by downsizing. The implication for management is that effective management of a downsizing programme can decrease the likelihood of a syndrome permeating an organization. Copyright
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We examine the effect of board composition on the restructuring activities of a sample of 94 firms that experienced a material decline in performance. We document that firms with a majority of outside directors on the board are more likely to initiate asset restructuring and employee layoffs and that the reduction in the scale of operations is larger for these firms than firms without a majority of outside directors. We also find subsequent improvements in operating performance for firms with a majority of outside directors that restructure and conclude that board composition has a material impact on corporate performance.
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Our results highlight the importance of interaction among management, labor, and investors in shaping corporate governance. We find that strong union laws protect not only workers but also underperforming managers. Weak investor protection combined with strong union laws are conducive to worker-management alliances, wherein poorly performing firms sell assets to prevent large-scale layoffs, garnering worker support to retain management. Asset sales in weak investor protection countries lead to further deteriorating performance, whereas in strong investor protection countries they improve performance and lead to more layoffs. Strong union laws are less effective in preventing layoffs when financial leverage is high. Copyright (c) 2009 The American Finance Association.
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This study expands the examination of workforce layoffs by banks to include non-bank financial institutions and explores inter-industry differences in market reactions to layoff announcements. In examining inter-industry differences, we control for variables that influence the market’s reaction to a layoff announcement, such as firm size, the size of the layoff, the reason given for the layoff, and the governance structure of the firm. We provide evidence of inter-industry differences in market reaction to layoff announcements by financial institutions, with banks experiencing more favorable stock-price reactions than other types of regulated firms. These results provide evidence that bank regulation reduces asymmetric information surrounding managerial announcements to a greater degree than the regulation of other types of financial institutions.
We examine the performance of 118 firms that downsized between 1989-93. We find that downsizing firms experience declines in operating performance prior to the downsizing announcement. Operating performance improves significantly following the downsizing. These firms are able to reduce the cost of sales, labor cost, capital expenditures and R&D expenditures. We also find that firms that perform poorly in their industries prior to the downsizing and have increases in assets following the downsizing have larger improvements in performance. There is some evidence that the improvements are greater for firms that increase their focus. Copyright 2000 by Kluwer Academic Publishers
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Partly in response to the Asian economic crisis, many organisations in the Asia Pacific rim reduced staff numbers. This research examines the New Zealand experience of this change intervention from 1997 to 1999. This includes an examination of the impact on financial performance, and how the process followed may moderate such an impact. A questionnaire instrument was designed to measure this, to which responses were received from 155 New Zealand for-profit organisations employing fifty or more people. There is some evidence to suggest that those respondents who had downsized over the period of the study reported lower measures of profitability than those who did not (p < .05). Also, ensuring the procedure was perceived as just by the employees, and offering outplacement help to those who lost their jobs, went some way to improving the financial performance of downsized firms (p < .05). This may suggest that if downsizing is necessary then attention needs to be given to how the process is implemented in order to maximise the financial return.
Article
Announcing a layoff decision could trigger either an increase or decrease in firm value, depending upon whether adverse market conditions or efficiency improvement are motivating it. Layoff announcements often contain information that indicates the motivation. This article finds that the layoff announcement is a useful signal for investors. There are significantly positive (negative) abnormal stock returns around the announcement date for firms that cite efficiency improvements (demand declines) as the reason for the layoffs.