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Investor Response to Workforce Downsizing: The Influence of Industry Waves, Macroeconomic Outlook, and Firm Performance
Abstract
Building on behavioral decision-making theory, we study the extent to which current industry downsizing intensity, changes in future macroeconomic outlook, and a firm’s past performance trend influence the relationship between downsizing magnitude and investor response. Based on the analysis of a large-scale sample of downsizing announcements in the United States over a period of 12 years, our results indicate that negative investor responses to downsizings are amplified in periods of industry downsizing waves, in the face of changes in macroeconomic outlook, and subsequent to deteriorating firm financial performance. Additionally, our empirical results suggest that investors’ cross-level aggregation of these cues has a significant, negative compound effect on downsizing firms’ market valuations.
... The findings from the extant literature are mixed not only on the valence of investor reaction (i.e., whether positive or negative) but also on the magnitude of the reaction (Brauer & Zimmermann, 2019). Specifically, the literature has recorded that investor reaction to layoff announcements varies from −5.077% (Kunert et al., 2017) to 2.09% (Nzau, 2016). ...
... A firm's layoff announcement conveys to the firm's investors (and other stakeholders) information that is unobservable and thus valuable to them. In addition, a layoff announcement is costly to the firm (Brauer & Zimmermann, 2019). ...
... The literature has suggested five reasons why investors-on average-react negatively to a firm's announcement of employee layoff. First, because a layoff-announcing firm likely makes severance payments to laid-off employees (Brauer & Zimmermann, 2019) and/or negotiate/litigate with employee unions (Velásquez et al., 2018), a layoff hurts the firm's cash flow in the immediate future (Cascio, 1993). Second, employees who survive the layoff may lack commitment toward the firm or perform less well relative to the pre-layoff period (Paulsen et al., 2005;Van Dierendonck & Jacobs, 2012). ...
Does a firm's layoff announcement elicit a negative or a positive reaction from its stock investors? The extant empirical evidence on this question is mixed. The authors' meta-analysis of 34,594 layoff announcements taken from 126 samples featured in 78 studies reports that the average investor reaction is significantly negative (effect size of −0.549). Next, the authors use signaling theory-specifically, characteristics of the signal, the signaler, and the signaling environment-to examine variation in investor reaction. They find that investors do not react if a layoff announcement signals proactive management (e.g., cost cutting) but penalize the firm if the layoff indicates reactive management (e.g., decline in demand). The penalty is also positively associated with layoff size but unrelated to firm size. Further, investors have become less punitive over time, or if its stock is traded on an exchange in civil law (vs. common law) country. The empirical generalizations guide managers on the consequences of their layoff announcements. K E Y W O R D S downsizing, layoff, meta-analysis, stock return
... However, the research findings remain largely equivocal. While downsizing has been found to result in a negative stock market response on average (Worrell et al., 1991;Lee, 1997;Elayan et al., 1998;Hallock, 1998;Wertheim and Robinson, 2000;Chen et al., 2001;Nixon et al., 2004;Capelle-Blancard and Couderc, 2007;Hillier et al., 2007;Farber and Hallock, 2009;Brauer and Zimmermann, 2019), we can observe that size and direction of the effect are not uniform over time, but seem to depend on the time period of the announcement (e.g. Farber and Hallock, 2009). ...
... First, our work enriches prior research on the impact of downsizing on stock market performance by providing an alternative theoretical view on the problem. With the exception of Brauer and Zimmermann (2019), who apply a behavioral perspective, the majority of studies utilize rational efficiency-centered arguments to explain stock market reactions to downsizing announcements (e.g. Worrell et al., 1991;Lee, 1997;Elayan et al., 1998;Hallock, 1998;Chen et al., 2001;Nixon et al., 2004;Hillier et al., 2007;Farber and Hallock, 2009). ...
... Following prior research (e.g. Lee, 1997;Stavrou et al., 2007;Brauer and Zimmermann, 2019), we use such firm announcements published in newspapers to identify corporate downsizing. 4 Empirical research has shown that downsizing measures by US firms significantly increased over the course of the 1990s (Budros, 1997(Budros, , 2004Farber and Hallock, 2009). ...
In this study, we examine stock market reactions to corporate downsizing using a neo-institutional perspective. Over the course of the 1990s, a time period in which shareholder value orientation gained momentum, downsizing became an institutionalized management practice. We argue and propose that the growing legitimacy of this practice is displayed in investors’ reactions to downsizing announcements. Using a sample of 391 downsizing announcements of the S&P 100 firms for the period 1990–2006, we show that the announcement year has a positive (diminishing) effect on the abnormal stock market return and that prior downsizings in the focal firm’s institutional field have a positive linear impact on abnormal stock market return. In addition, we provide evidence that these relationships are positively moderated by proactive downsizing motives and firm size. Our results contribute to a deeper understanding of the performance effects of corporate downsizing and investors’ role in legitimizing this prevalent business practice.
... In today's hypercompetitive environment, corporate downsizing provides an ideal resource restructuring alternative that enables firms to respond to internal and external pressures and challenges (Brauer and Zimmermann, 2019;Carriger, 2016Carriger, , 2018Cascio et al., 1997;D'aveni, 2010;Datta et al., 2010;Guthrie and Datta, 2008;March and Simon, 1958). Such initiatives are increasingly common in several economies in the world, particularly at times of economic downtrends (Brauer and Zimmermann, 2019;Datta and Basuil, 2015). ...
... In today's hypercompetitive environment, corporate downsizing provides an ideal resource restructuring alternative that enables firms to respond to internal and external pressures and challenges (Brauer and Zimmermann, 2019;Carriger, 2016Carriger, , 2018Cascio et al., 1997;D'aveni, 2010;Datta et al., 2010;Guthrie and Datta, 2008;March and Simon, 1958). Such initiatives are increasingly common in several economies in the world, particularly at times of economic downtrends (Brauer and Zimmermann, 2019;Datta and Basuil, 2015). Firms may decide to downsize their workforce as a way to restructure their resources (Carriger, 2016), to manage their costs (Sheaffer et al., 2009), to respond to macroeconomic conditions (Datta et al., 2010) or to bolster their efficiency (Palmon et al., 1997). ...
... An important question that remains a central focus of research in this topic is: How does corporate downsizing affect the firm's shareholder's value? Despite the simplicity of this question, the conclusions drawn from empirical research remain largely equivocal (Brauer and Zimmermann, 2019;Datta et al., 2010). While the majority of empirical evidence suggests an immediate and negative effect of downsizing initiatives on firm performance (Carriger, 2016;Guthrie and Datta, 2008;Hillier et al., 2007;De Meuse et al., 2004;De Meuse and Dai, 2013;De Meuse et al., 1994;Nixon et al., 2004), other studies found a positive effect on a firm's shareholders' value (Brookman et al., 2007;Datta et al., 2010;Espahbodi et al., 2000;Palmon et al., 1997;Yu and Park, 2006). ...
Purpose
How does corporate downsizing contribute to a firm’s long-term value? While the extant empirical findings on this relationship are inconclusive, contradictory and equivocal, the answers to this question remain particularly important in today’s business environment. Considering that downsizing is often directed toward long-term growth and survival, this paper aims to posit that scholars should account for the temporal nature of this strategic decision to understand its economic impact on the firm’s operations. Therefore, this paper provides a more rigorous empirical examination of how a firm’s decision to downsize its workforce affects that firm’s long-term value.
Design/methodology/approach
This paper used Wibbens and Siggelkow’s (2020) measure of long-term investor value appropriation (LIVA) to directly observe the effects of corporate downsizing on firm long-term value and growth. Using a sample of 3,149 US publicly traded manufacturing firms that operated between 2002 to 2018, this paper tested the main effect of downsizing on LIVA and 3 boundary condition hypotheses.
Findings
This paper found a positive relationship between corporate downsizing and a firm’s long-term value. Interestingly, this positive relationship is stronger among firms that had high human resource slack and R&D intensity. Contrary to the expectations, this paper did not find support for the moderation effect of the proximity to bankruptcy on the relationship between corporate downsizing and a firm’s long-term value.
Originality/value
With these findings, the paper sheds light on the long-term implications of a firm’s decision to downsize its workforce.
... However, the research findings remain largely equivocal. While downsizing has been found to result in a negative stock market response on average (Worrell et al., 1991;Lee, 1997;Elayan et al., 1998;Hallock, 1998;Wertheim and Robinson, 2000;Chen et al., 2001;Nixon et al., 2004;Capelle-Blancard and Couderc, 2007;Hillier et al., 2007;Farber and Hallock, 2009;Brauer and Zimmermann, 2019), we can observe that size and direction of the effect are not uniform over time, but seem to depend on the time period of the announcement (e.g. Farber and Hallock, 2009). ...
... First, our work enriches prior research on the impact of downsizing on stock market performance by providing an alternative theoretical view on the problem. With the exception of Brauer and Zimmermann (2019), who apply a behavioral perspective, the majority of studies utilize rational efficiency-centered arguments to explain stock market reactions to downsizing announcements (e.g. Worrell et al., 1991;Lee, 1997;Elayan et al., 1998;Hallock, 1998;Chen et al., 2001;Nixon et al., 2004;Hillier et al., 2007;Farber and Hallock, 2009). ...
... Following prior research (e.g. Lee, 1997;Stavrou et al., 2007;Brauer and Zimmermann, 2019), we use such firm announcements published in newspapers to identify corporate downsizing. 4 Empirical research has shown that downsizing measures by US firms significantly increased over the course of the 1990s (Budros, 1997(Budros, , 2004Farber and Hallock, 2009). ...
... Past research has perhaps overlooked resource constraints because of the assumption that only organisations that possess excess slack tend to downsize. Our study extends current research by considering the timing and magnitude of downsizing (Brauer and Zimmermann, 2019;Desai, 2019). Incorporating resource constraints may explain the contradictory findings on the effect of downsizing on organisational innovation (Dolmans et al., 2014). ...
... Most researchers agree that a 5% reduction in employees is a significant corporate event that points to downsizing (e.g. Ahmadjian and Robinson, 2001;Brauer and Zimmermann, 2019). Fourth, firms must have at least 10 granted patents in total during the observed period because businesses that produce less than one patent every 2 years on average are not considered to be focused on producing this type of innovation. ...
Although the practice of downsizing is prevalent, its effects on organisational outcomes remain poorly understood. This article examines how and when downsizing affects organisational innovation. Using a unique data set of UK firms over a period of 22 years, we test the effect of downsizing on innovation outputs by considering the moderating role of resource slack and constraints. We argue and empirically demonstrate that downsizing has a dual effect on innovation, contingent on the firm’s level of resources. Our results reveal that downsizing affects innovation outputs positively in firms experiencing resource slack and negatively in firms experiencing resource constraints. We also show that the effect is more immediate in resource-constrained firms. Theoretical and managerial implications of these results are discussed.
JEL Classification: J63, L25, M51, O32
... A munkaerő könnyebben csökkenthető, mint a fizikai eszközök, érthetővé téve, hogy a leépítés korai lehetőség a szervezetek számára, amelyek megpróbálják csökkenteni a költségeket [15], [22]. A leépítés anyagi előnyei azonban nem egyértelműek, mivel a piaci válaszok hosszú távon általában negatívak [12]. A befektetési döntések sokszor az optimálisnál rövidebb horizontúak [18], [59], és ugyanez a megfelelőnél rövidebb befektetési döntésekhez vezető gondolkodás vezérli a szervezet vezetőit a rövid távú leépítési döntések meghozatalakor. ...
... With the downsizing, the required knowledge will be decreased and this is one of the most important issues for renewed company. According to Brauer and Zimmermann (2019), "larger downsizings are likely to be associated with greater losses in intellectual capital and greater disruptions of internal networks and routines", while Đorđević and Đukić (2008) found that downsizing can even decrease the corporate reputation, which will be important problem in future staffing process (recruitment and selection) of new employees. ...
... Utilization of assets to make a profit shows a good company performance in managing all the funds invested in assets. Company performance can be an attraction for investors (Brauer & Zimmermann, 2019). Likewise, the implementation of GCG can provide accurate information for investors so that potential investors can put trust in the company by buying shares (Kaihatu, 2006;Mukhtaruddin, Ubaidillah, Dewi, Hakiki, & Nopriyanto, 2019;and Sadiq & Abbas, 2019). ...
This study aims to analyze the effect of Asset Management (AM) and Good Corporate Governance (GCG) on stock prices through Return on Investments (ROI). This research is an explanation using quantitative methods. The population of 64 companies is listed on the Indonesia Stock Exchange and is engaged in property and construction. The sampling technique uses purposive sampling with the results of 36 companies. The data used is the 2016-2018 financial statements. The analysis used is path analysis. The results of the study prove that Management asset significantly influences ROI, GCG significantly influences ROI, Management asset significantly influences stock prices, GCG has a significant effect on stock prices, ROI has a significant effect on stock prices, Management asset has a significant effect on stock prices through ROI, GCG has a significant effect on share price through ROI.
DOI: https://doi.org/10.26905/afr.v3i1.4296
... Hence, performance is correlated to managers and business pioneers' ability to integrate their knowledge about markets: awareness toward clients and importers' needs in addition to other stockholders', being close to emerging markets, insights into business potentials and identifying ideas and exploiting them through innovation (Thorpe et al., 2005). As a result, companies should develop the appropriate conditions to enhance knowledge development as implementing knowledge management means more than just implementing a set of IT tools but rather it includes changes within the organizational structure, processes and culture and the first step for shifting from a traditional company into a knowledgeable one is to focus attention on intangible assets represented by intellectual capital (Brauer and Zimmermann, 2017;Heisig, 2009). The later has great potentials at individual and groups levels as it represents organizations' futures, so there must be more interest focused on it than financial assets for its effect on the organization profitability as well as constructing a trade mark through achieving a higher level of quality (Datta and Ahmed, 2015). ...
Depending on a model for organizational context within work groups and a job perspective for the socially responsible behaviors, we have developed and examined a model for small and medium enterprises' success within the work place that explains some reasons leading to small and medium institutions' success. The sample included 217 workers in small and medium companies in Iraq. It was found that the intellectual capital integration and intentional junior accountants' turnover were related to small and medium companies' success within the work place for companies' members, in addition, there was a direct relationship between accountants' turnover and intellectual capital integration and small and medium companies' success and there also was an indirect relationship mediated by the financial knowledge management system within work groups.
... Hence, performance is correlated to managers and business pioneers' ability to integrate their knowledge about markets: awareness toward clients and importers' needs in addition to other stockholders', being close to emerging markets, insights into business potentials and identifying ideas and exploiting them through innovation (Thorpe et al., 2005). As a result, companies should develop the appropriate conditions to enhance knowledge development as implementing knowledge management means more than just implementing a set of IT tools but rather it includes changes within the organizational structure, processes and culture and the first step for shifting from a traditional company into a knowledgeable one is to focus attention on intangible assets represented by intellectual capital (Brauer and Zimmermann, 2017;Heisig, 2009). The later has great potentials at individual and groups levels as it represents organizations' futures, so there must be more interest focused on it than financial assets for its effect on the organization profitability as well as constructing a trade mark through achieving a higher level of quality (Datta and Ahmed, 2015). ...
Depending on a model for organizational context within work groups and a job perspective for the socially responsible behaviors, we have developed and examined a model for small and medium enterprises' success within the work place that explains some reasons leading to small and medium institutions' success. The sample included 217 workers in small and medium companies in Iraq. It was found that the intellectual capital integration and intentional junior accountants' turnover were related to small and medium companies' success within the work place for companies' members, in addition, there was a direct relationship between accountants' turnover and intellectual capital integration and small and medium companies' success and there also was an indirect relationship mediated by the financial knowledge management system within work groups. Key words: integrating intellectual capital, junior accountants turnover intentions, financial knowledge management success, of small and medium enterprises
... Hence, performance is correlated to managers and business pioneers' ability to integrate their knowledge about markets: awareness toward clients and importers' needs in addition to other stockholders', being close to emerging markets, insights into business potentials and identifying ideas and exploiting them through innovation (Thorpe et al., 2005). As a result, companies should develop the appropriate conditions to enhance knowledge development as implementing knowledge management means more than just implementing a set of IT tools but rather it includes changes within the organizational structure, processes and culture and the first step for shifting from a traditional company into a knowledgeable one is to focus attention on intangible assets represented by intellectual capital (Brauer and Zimmermann, 2017;Heisig, 2009). The later has great potentials at individual and groups levels as it represents organizations' futures, so there must be more interest focused on it than financial assets for its effect on the organization profitability as well as constructing a trade mark through achieving a higher level of quality (Datta and Ahmed, 2015). ...
Depending on a model for organizational context within work groups and a job perspective for the socially responsible behaviors, we have developed and examined a model for small and medium enterprises' success within the work place that explains some reasons leading to small and medium institutions' success. The sample included 217 workers in small and medium companies in Iraq. It was found that the intellectual capital integration and intentional junior accountants' turnover were related to small and medium companies' success within the work place for companies' members, in addition, there was a direct relationship between accountants' turnover and intellectual capital integration and small and medium companies' success and there also was an indirect relationship mediated by the financial knowledge management system within work groups. Key words: integrating intellectual capital, junior accountants turnover intentions, financial knowledge management success, of small and medium enterprises
Purpose
Based on the theory of basic human values, this study aims to examine the impact of CEO conservation (i.e. security, conformity and tradition) and openness to change (i.e. self-direction, stimulation and hedonism) values on one of the most conflictual decisions inside a firm: workforce downsizing.
Design/methodology/approach
The hypothesis testing was done in the context of all workforce downsizing decisions made by German companies (and their CEOs) listed on the German Prime-Index between 2005 and 2019. A software-based psycholinguistic assessment of various sources of CEO communications was conducted to tap into their underlying values.
Findings
Tobit regression analysis confirms that CEO conservation and openness-to-change values impact the severity of workforce downsizing. Namely, the higher the CEO conservation values, the lower the downsizing severity (i.e. employees dismissed in relation to overall workforce). In contrast, the higher the CEO openness to change values, the higher the downsizing severity.
Originality/value
Against prior research that has centered around political ideology as a proxy to understand the mechanisms through which values impact strategic decisions, the present study employs advanced measurement approaches to assess the general impact of CEO values on critical firm decisions. As such, the study contributes to upper echelons research by offering a new perspective on how CEO values impact critical firms' decisions.
Bu çalışmada, Borsa İstanbul’da yer alan ve enerji sektöründe faaliyet gösteren firmaların uyguladıkları küçülme stratejilerinin ve ana faaliyetle ve çeşitlendirme ile ilgili olan yatırım stratejilerinin firma performansı üzerindeki etkileri incelenmiştir. Bu kapsamda, 2000 ile 2021 yılları arasında Borsa İstanbul 100 endeksinde yer alan enerji sektöründeki şirketlerin piyasaların genişleme trendi içine girmiş oldukları dönemlerinde uyguladıkları küçülme ve yatırım stratejileri belirlenerek ve bu stratejilerin firma performansıyla aralarında anlamlı bir ilişkinin bulunup bulunmadığının belirlenmesi amacıyla analizler yapılarak ve firma performansı üzerinde en fazla performansa sahip olan stratejiler değerlendirilmiştir. Bu çalışmanın diğer çalışmalardan farklı olan yönü henüz Türkiye’de söz konusu stratejilerin üçünün de genişleme dönemleri için bir arada değerlendirildiği ve karşılaştırıldığı çalışma sayısının oldukça sınırlı olmasından kaynaklanmaktadır. Çalışmada, firma performansının ölçülmesinde, borsa kapanış fiyatı, varlıklardaki büyüme oranı, Tobin’s Q, ROA, toplam hissedar getirisi, nakit akışlarının getiri oranı, hisse başına kazanç ve kümülatif performans değişkenleri kullanılmıştır. Yapılan bu çalışma dış geçerlilikle sınırlıdır. Gelecek çalışmalar için veri setinin büyütülmesi ve bu sektörde faaliyet gösteren daha fazla firmanın analizin kapsamına alınması daha doğru ve belirgin sonuçların ortaya çıkmasına imkân verecektir.
This study offers a comprehensive and multidisciplinary review of the research on the antecedents of investor valuation in the management, accounting, and finance literature. Despite the growing recognition of the importance of investors and financial markets, our current understanding of the factors that drive investor valuation remains incomplete. To address this gap, we classify the existing literature on investor valuation into three perspectives: social, cognitive, and economic. The social perspective examines how social forces, such as institutional norms and pressure, shape investor valuation. The cognitive perspective focuses on the psychological underpinnings of investors’ valuation decisions, while the economic perspective emphasizes how investors determine the value of firms through rational cost-and-benefit calculations. This review compares the research on investor valuation in the management literature to that in the accounting and finance literature, identifying gaps in the management literature and discussing emerging trends that may influence investor valuation. The review also proposes an agenda for future research. In conclusion, this study illuminates the intricate and multifaceted nature of investor valuation, as well as the underlying factors that influence it.
Research Summary
Firms often succumb to a growth imperative, yet little is known about how congruence between various forms of growth affects firm value. We argue that the (in)congruence between net hiring rates (e.g., growth in the number of employees) and sales growth has significant implications for firm value, assessed via Tobin's Q. We further contend that R&D expenditures and industry dynamism—factors that influence a firm's ability to realize value creation—moderate the relationship between growth pattern and firm value. We use a sample of 1,181 firms that conducted their initial public offerings from 1996 to 2006 to test our conceptual model. Findings indicate that employee‐dominant growth is most strongly associated with firm value, and that high levels of R&D expenditures and industry dynamism intensify these relationships.
Managerial Summary
Growth is a goal and challenge for many firms, and navigating the various demands of growth represents a particularly promising opportunity for firms that recently went public. We study how firms can manage the growth process in a way that enhances firm value. Using a sample of 1,181 firms that conducted their initial public offerings from 1996 to 2006, we explore the interplay of employee and sales growth rates on value creation. We find that an employee‐dominant growth pattern was more strongly related to firm value than the other patterns. Our findings also suggest that managers, especially those in firms that invest in R&D and operating in dynamic industries, should avoid a strong focus on sales growth without also ensuring growth in employees.
The impact of the coronavirus disease (COVID‐19) pandemic is unprecedented. At an organisational level, the crisis has been hugely disruptive, complex and fraught with ambiguity for leaders. The crisis is fundamentally a human one, making human resource (HR) leaders central in enabling organisations to manage through and ultimately exit the crisis successfully. We apply a paradox lens to understand the HR leadership challenges posed by the COVID‐19 crisis. We argue that how the HR function responds to the challenges of the crisis and its role in mapping the exit route from the crisis are likely to shape the trajectory of the function for decades to come. The pandemic creates an unprecedented opportunity to elevate the status of the HR function in organisations where it has struggled to gain status and to reinforce the influence of the function in those where it already enjoys legitimacy. The value of this is likely to be reflected in more sustainable performance through the alignment of people and purpose and balancing the short and long term objectives of the organisation.
This study contributes to the literature of women on boards of directors by showing how female board representation affects the board’s involvement in the strategy of employment downsizing, and whether the downsizing strategy mediates female directors’ influence on firm performance. We examine data of Taiwanese 1329 manufacturing firms over the 1996–2017 period and apply dynamic panel methods to deal with the endogeneity problems contained in the mediation model. Evidence on the gross effect of women on boards supports our contention that in Taiwanese socio-cultural context, the cognitive frames and human capital female directors bring to boards can improve the firms’ accounting-based performance; however, investors’ ingrained bias against women may dilute the positive impact and lead to unfavorable stock market reaction to the firms with female directors. Focusing on the indirect mediating effect, our results indicate that perhaps because female directors’ leadership style and core values provide boards with more stakeholder-oriented perspectives, the firms with more women directors tend to implement less downsizing, and such talent-retaining strategy is beneficial to firm performance. This positive indirect effect is investors’ bias-free, that is, women on boards can be leveraged for higher accounting returns and stock market valuation through their involvement in downsizing.
The Business Roundtable, a large group of top CEOs, recently issued a statement defining the purpose of the corporation in stakeholder terms, a direct and intended reversal from an earlier statement that defined the duty of directors as serving the interests of stockholders. In this editorial, we briefly describe the major twists and turns in the stockholders-versus-stakeholders debate that make this statement so significant to management theory and practice. We then describe the implications of the statement for scholars and practicing managers. We end with a description of three specific research topics that require more research in light of this statement: firm boundaries, the nature of value creation systems, and theory regarding the destruction of stakeholder value.
Building on social exchange theory, this study examines the relationship between perceptions of organizational politics and employee performance and interpersonal skills. We hypothesized that perceptions of organizational politics create an imbalance in the exchange relationship between employee and organization, which leads to organizational deviance. We also hypothesized that supervisors may attempt to rebalance the exchange relationship by providing lower performance and interpersonal skills ratings. Finally, we suggest that politically skilled employees avoid an increase in negative ratings. The present study demonstrates that perceptions of organizational politics may lead to negative employee behaviors and reduced supervisors’ ratings in an effort to rebalance the exchange relationship. In addition, politically skilled employees may avoid increased negative ratings when politics perceptions are high.
In this paper, we examine the relationship between managerial ability and corporate layoffs as well as unemployment. We find managerial ability is negatively related to layoffs. Further, we find the average managerial ability of a county is negatively related to the county’s unemployment rate. The negative relationship is strengthened in counties with low education or income levels. The above findings are consistent with the notion that high-ability managers are less likely to use layoffs to enhance firm efficiency, and managerial ability is especially important for counties with low education or income levels.
The business literature on the causes and consequences of downsizing has grown significantly over the last three decades. A multitude of causes has been identified. Downsizing is sometimes seen primarily as a cost-reducing response to various crises and external factors over which management has little or no control. Others see downsizing as a strategic management initiative in its own right. A considerable body of literature indicates workforce reductions often lead to negative financial and operational outcomes for the downsizing firm as well as negative psychological outcomes for victims, survivors, and executioners. This research paper represents a literature review on the causes and consequences of downsizing. It addresses a diverse body of literature and suggests an integrative framework on the typical causes and consequences of downsizing as well as outlines some challenges ahead for researchers seeking to advance the knowledge of downsizing.
Over the past couple of decades, employee downsizing has become a fact of organizational life, not just in the U.S. but, increasingly so, in other countries, with unprecedented levels of downsizing occurring in several countries during the last recession. Seen as being inevitable in an increasingly competitive global marketplace, the high levels of downsizing activity attest to the deep-seated belief among managers that downsizing enhances organizational efficiency and leads to improved financial performance. Critics, on the other hand, argue that benefits are illusory and point out that attendant costs, both visible and invisible, can make downsizing a relatively ineffective tool for creating firm value.
After a brief discussion of the factors that motivate and propel firms to engage in downsizing, we, in this article, examine the findings of extant research to assess whether downsizing does indeed improve organization performance. What we find based on our examination of 55 studies is that the findings are equivocal with very little agreement among researchers on the efficacy of employee downsizing to create organizational value. We explore possible reasons for the same and conclude by providing directions for future research that, we believe, will provide the insights that scholars and managers need to better understand the complex relationship between employee downsizing and firm value.
Confirmation bias, as the term is typically used in the psychological literature, connotes the seeking or interpreting of evidence in ways that are partial to existing beliefs, expectations, or a hypothesis in hand. The author reviews evidence of such a bias in a variety of guises and gives examples of its operation in several practical contexts. Possible explanations are considered, and the question of its utility or disutility is discussed.
In this study, we analyze the effect of layoff announcements on the market's valuation of firms. The event study methodology is applied to a sample of 214 announcements of layoffs made by major Canadian firms that traded on the Toronto Stock Exchange over the period 1982-1989. The main results are: (1) The market responds to the news of layoffs in a negative fashion, lowering the value of firms that announce layoffs, and (2) almost all of the negative response occurs on the day of the announcement, suggesting that the market is not able to fully anticipate the new information, but that it responds to it very quickly.
Acquisitions often occur in waves within industries. We extend the theoretical understanding of such waves by drawing upon research on early mover advantage and bandwagon effects to develop arguments regarding the likely performance potential of participating at different points in an acquisition wave. In line with our theoretical model, we find acquisition performance is higher for early movers but lower for acquirers that participate at the height of the acquisition wave. Although we find this general performance trend, our findings suggest both industry and acquirer characteristics influence the degree to which firms seize early mover advantages or fall prey to bandwagon pressures.
We examine whether market-wide investor sentiment influences the stock price sensitivity to firm-specific earnings news. Using the recently developed measure of investor sentiment by Baker and Wurgler (2006), we find that the stock price sensitivity to good earnings news is higher during high sentiment periods than during periods of low sentiment, whereas the stock price sensitivity to bad earnings news is higher during periods of low sentiment than during periods of high sentiment. This influence of sentiment is especially pronounced for the earnings news of small stocks, young stocks, high volatility stocks, non-dividend-paying stocks, and stocks with extremely high and low market-to-book ratios. Further analysis suggests that the sentiment-driven mispricing of earnings contributes to the general mispricing of stocks due to investor sentiment.
JEL Classifications: D14; D21; G24.
Downsizing is a common business management practice. Prior research has examined the financial consequences of downsizing or the impact on individuals remaining in a downsizing organization. Taking a resource-based perspective, this study integrates and extends prior research on downsizing by examining how downsizing influences the relative likelihood that a firm will experience one of three states in the three years following downsizing. Multinomial logistic regression is employed to test hypotheses using a sample of 445 firms that downsized during the period 1995 to 2000. The authors find significant differences in the relative likelihood of Chapter 11 bankruptcy, acquisition, or remaining a nonbankrupt going concern based on the size of the downsizing, firm-level intangible resources, the tangible asset intensity of the firm, and industry-level knowledge intensity. Implications for managers and future research are discussed.
In content analysis and similar methods, data are typically generated by trained human observers who record or transcribe textual, pictorial, or audible matter in terms suitable for analysis. Conclusions from such data can be trusted only after demonstrating their reliability. Unfortunately, the content analysis literature is full of proposals for so-called reliability coefficients, leaving investigators easily confused, not knowing which to choose. After describing the criteria for a good measure of reliability, we propose Krippendorff's alpha as the standard reliability measure. It is general in that it can be used regardless of the number of observers, levels of measurement, sample sizes, and presence or absence of missing data. To facilitate the adoption of this recommendation, we describe a freely available macro written for SPSS and SAS to calculate Krippendorff's alpha and illustrate its use with a simple example.
Short-window event studies are popular in the strategic management literature. These studies assume that the market's initial reaction to strategic events reflects their economic impact in an unbiased manner. This assumption may hold in some cases, but when an event has complex ramifications that are difficult to predict, the initial market response may be biased and/or incomplete. Acquisitions are complex events, suggesting that results from short-window event studies of acquisitions may foster incorrect inferences. Using a sample of horizontal acquisitions, this article shows that the positive initial market response to an acquisition announcement is contradicted by negative long-run post-acquisition returns, suggesting that the initial response is incorrect and that the error is rectified later. Our findings imply that short-window event studies may not accurately capture the economic impact of complex strategic actions, for the interpretation and use of event studies.
During the last two decades, workforce reductions played an integral role in the restructuring strategies of many companies, especially for Fortune 500 companies. However, research in this important area has been limited. A doubly (multivariate) repeated measures design was chosen for this study to determine the longitudinal impact of workforce reductions on financial performance. The largest 250 U. S. corporations, as measured by 1992 revenues, were divided into two groups based on whether or not the company announced a significant workforce reduction initiative of at least 3% during the period 1991–92. Financial performance was measured by growth in sales and market capitalization for the period 1989 to 1996, thus providing two years of pre-event data and six years of post-event data. We found that workforce reductions significantly improved subsequent financial performance, particularly in the short term.
While downsizing rages through the U.S. economy, there is a great deal of uncertainty about its bottom-line effects. This uncertainty raises questions about why corporations have been so eager to engage in downsizing. In this article, we propose an answer to these questions. Three social forces, which we call constraining, cloning and learning, frequently provide a major impetus for downsizing. We describe these forces, and point out conditions that lead to the adoption of downsizing without due regard for its mixed consequences. We suggest methods to improve executives’ downsizing decision routines … methods that should enhance the chances of achieving intended benefits.
Downsizing, the planned elimination of positions or jobs, is a phenomenon that has affected hundreds of companies and millions of workers since the late 1980s. While there is no shortage of articles on "How To" or "How Not To" downsize, the current article attempts to synthesize what is known in terms of the economic and organizational consequences of downsizing. We argue that in many firms anticipated economic benefits fail to materialize, for example, lower expense ratios, higher profits, increased return-on-investment, and boosted stock prices. Likewise, many anticipated organizational benefits do not develop, such as lower overhead, smoother communications, greater entrepreneurship, and increases in productivity. To a large extent, this is a result of a failure to break out of the traditional approach to organization design and management--an approach founded on the principles of command, control, and compartmentalization. For long-term, sustained improvements in efficiency, reductions in headcount need to be viewed as part of a process of continuous improvement that includes organization redesign, along with broad, systemic changes designed to eliminate redundancies, waste, and inefficiency.
Confirmation bias, as the term is typically used in the psychological literature, connotes the seeking or interpreting of evidence in ways that are partial to existing beliefs, expectations, or a hypothesis in hand. The author reviews evidence of such a bias in a variety of guises and gives examples of its operation in several practical contexts. Possible explanations are considered, and the question of its utility or disutility is discussed. When men wish to construct or support a theory, how they torture facts into their service! (Mackay, 1852/ 1932, p. 552) Confirmation bias is perhaps the best known and most widely accepted notion of inferential error to come out of the literature on human reasoning. (Evans, 1989, p. 41) If one were to attempt to identify a single problematic aspect of human reasoning that deserves attention above all others, the confirma- tion bias would have to be among the candidates for consideration. Many have written about this bias, and it appears to be sufficiently strong and pervasive that one is led to wonder whether the bias, by itself, might account for a significant fraction of the disputes, altercations, and misun- derstandings that occur among individuals, groups, and nations.
Using a unique high-frequency futures dataset, we characterize the response of U.S., German and British stock, bond and foreign exchange markets to real-time U.S. macroeconomic news. We find that news produces conditional mean jumps; hence high-frequency stock, bond and exchange rate dynamics are linked to fundamentals. Equity markets, moreover, react differently to news depending on the stage of the business cycle, which explains the low correlation between stock and bond returns when averaged over the cycle. Hence our results qualify earlier work suggesting that bond markets react most strongly to macroeconomic news; in particular, when conditioning on the state of the economy, the equity and foreign exchange markets appear equally responsive. Finally, we also document important contemporaneous links across all markets and countries, even after controlling for the effects of macroeconomic news.
Little is known about the relationship between family firms and downsizing. This study aims to close this gap. The study distinguishes between family management and family ownership as two distinct dimensions of family firms and analyzes their respective influences on downsizing. The findings suggest that the extent of family ownership decreases the likelihood of deep job cuts, whereas family management has no impact. However, family management is found to moderate the relationship between firm profitability and the likelihood of downsizing. It is suggested that family owners care more about their reputation for social responsibility than do other owners, motivating them to avoid deep job cuts.
In this paper, we focus on a relatively underexplored aspect of sustainability—workforce reductions. We investigate the determinants and consequences of the decisions made by French firms to use press releases in order to announce downsizing operations. We also examine whether the content of press releases has an impact on investor reactions to downsizing announcements. Particularly in the French context, downsizing operations reflect negatively on corporate social responsibility with respect to employees, and we anticipate that French managers will use disclosure strategies to counter a potential legitimacy threat. Our sample consists of 227 downsizing operations announced between 2007 and 2012 by 119 French listed firms. We find that the disclosure of press releases is driven by both contextual and legitimacy factors. We also find that press releases are associated with more negative reactions to downsizing announcements than when there is no press release, particularly in the case of proactive operations (i.e., implemented by firms with improving performance). A content analysis of press releases indicates that firms, on average, engage in a reactive impression management strategy in their disclosure that consists of attributing downsizing operations to external factors. Moreover, investors penalize the use of proactive arguments, particularly when they are used to justify proactive operations. Overall, our results show that, in the French case, disclosure strategies and their consequences on the financial markets relate to a legitimacy perspective.
This paper examines the equity market reaction to consumer sentiment in the context of the sentiment index issued by the Melbourne Institute of Applied Economics and Social Research. Unlike the Michigan index in the US, which is announced in phases, this index is announced once per month, which makes the Australian counterpart particularly useful for analyzing the announcement effects of sentiment. Our results indicate that consumer sentiment has valuable information content. Further, a version of the “negativity effect” (from the psychology literature) is documented in which an asymmetric response is observed with regard to “good” versus “bad” sentiment news. Specifically, when a lower (higher) than previous month consumer sentiment index is announced, the equity market experiences a significant negative announcement day (no) effect. The stock market recovers from the “bad sentiment news” shock, post announcement. The results are robust to a range of additional tests.
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.
This study advances a social constructionist view of financial market behavior. The paper suggests that the market's reaction to particular corporate practices, such as stock repurchase plans, are not, as financial economists contend, simply a function of the inherent efficiency of such practices. Rather, stock market reactions are also influenced by the prevailing institutional logic and the degree of institutionalization of the practice. The theory first predicts that the emergence of the agency perspective on corporate governance in the mid-1980s represented a powerful new institutional logic that would lead the market to reverse its prior aggregate reaction to stock repurchase plans in the United States. The paper then considers the potential for institutional decoupling of repurchase plans and develops competing hypotheses about how the market value of these policies might have changed as more firms formally adopted, but did not implement, the plans over time. In contrast to a financial economic perspective on market valuation, which suggests that markets should discount the value of a policy as evidence of non-implementation accumulates, this study posits that institutionalization processes might increase the market value of a policy as more firms adopt it, despite growing evidence of decoupling. Implications for institutional theory and theoretical perspectives on capital markets are discussed.
To what extent do broadly based sociocultural norms affect the distribution of organizational characteristics within a population over time? Under what circumstances are institutional norms more important than alternative processes, such as market forces, in shaping this distribution? This sociohistorical analysis of the impact of nationalism on the language of publication of Finnish newspapers in the 19th century examines the interplay of institutional, ecological, and economic forces. The findings confirm that the power with which institutional norms influence organizations can vary over time, across levels of analysis, and as a function of ecological and economic forces and other, more proximal, sources of institutional expectations.
Because of the "opaque" nature of divestitures, investors face considerable uncertainty in evaluating divestiture decisions and thus may look to a firm's social context, defined in terms of the pervasiveness of divestiture activity in its industry, to infer the quality of such a decision. Specifically, we propose that a firm's position in an industry divestiture wave conveys information about whether or not managers are imitating their industry peers, which in turn will influence how investors perceive and assess the quality of the decision and its likely performance consequences. Supporting this theoretical argument, we find that the relationship between divestiture position and stock market returns exhibits a U-shaped pattern, with divestitures that occur at the peak of an industry divestiture wave generating the lowest stock market returns. We also find that industry characteristics (e.g., munificence) reinforce the effect of position in wave on investor response. Our study is the first to incorporate the role of a firm's social context, assessed in terms of the pervasiveness of an activity, as an important factor that influences how investors perceive and evaluate divestiture decisions.
Downsizing disrupts existing social networks in organizations. Layoff survivors' reactions to losses of both friends and coworkers in similar structural positions (structural equivalents) are examined here. A field study conducted in a consumer electronics firm revealed negative reactions to the loss of friends and positive reactions to the loss of coworkers in similar structural positions. The loss of friends weakened survivors' network centrality, but the loss of structural equivalents benefited network position and increased satisfaction with promotion opportunities.
To better understand the phenomenon of organizational downsizing, we compare three theoretical perspectives on downsizing: the economic, the institutional, and the sociocognitive. We use the three perspectives to organize the growing empirical literature on downsizing, and we link streams of empirical work to the theoretical perspective that underlies each. With our sociocognitive model, we argue that downsizing has become institutionalized through the collectivization and reification of a “downsizing is effective” schema. We also discuss implications for future theory and research.
To better understand the phenomenon of organizational downsizing, we compare three theoretical perspectives on downsizing: the economic, the institutional, and the sociocognitive. We use the three perspectives to organize the growing empirical literature on downsizing, and we link streams of empirical work to the theoretical perspective that underlies each. With our sociocognitive model, we argue that downsizing has become institutionalized through the collectivization and reification of a "downsizing is effective" schema. We also discuss implications for future theory and research.
p class="MsoNormal" style="text-align: justify; margin: 0in 0.5in 0pt;"> The current study extends theory developed by Malatesta and Thompson (1985) to the area of corporate downsizing, and finds that the magnitude of the stock price reaction to announcements of corporate layoffs is a function of two factors, (1) the economic impact of the announced layoff, and, (2) the degree to which the announcement and signal about the underlying conditions related to the announcement have been anticipated by investors and incorporated previously into the stock price (predisclosure information).
For firms experiencing a negative overall stock price reaction at the date of a layoff announcement, the larger the layoff (proxy for economic impact), the more negative the stock price reaction. Also for these firms, the smaller the firm size (proxy for the level of predisclosure information), the more negative the stock price reaction. This provides evidence that for some firms, the financial distress effect dominates, and the market incorporates previously unknown negative information into the stock price, which results in the negative stock price reaction. For these firms, the larger the impact and the less the event is anticipated, the more negative is the stock price reaction.
For firms experiencing a positive overall stock price reaction at the date of a layoff announcement, the larger the layoff (proxy for economic impact), the more positive the stock price reaction. Also for these firms, the smaller the firm size (proxy for level of predisclosure information), the more positive the stock price reaction. This provides evidence that for some firms, the potential benefit effect dominates. The market has previously incorporated negative information associated with the conditions leading up the layoff, and is now incorporating positive information about the benefits to be achieved by the layoff, which results in the positive stock price reaction. For these firms, the larger the impact and the less the event is anticipated, the more positive is the stock price reaction.
In this study, hypotheses are developed which combine the effects of both economic impact and predisclosure information with the financial distress and potential benefit hypotheses developed in prior research in corporate downsizing. Instead of offering the these two hypotheses as competing and mutually exclusive, evidence is provided that supports the conclusion that these hypotheses simultaneously explain concurrent and additive effects on the stock price reaction to announcements of company layoffs. Finally, results indicate that the relationship between economic impact, predisclosure information and stock price reaction to layoff announcements depends on the relative dominance of the signals provided by the layoff about both financial distress and potential benefit. </p
How do business organizations make decisions? What process do they follow in deciding how much to produce? And at what price? A behavioral theory of the firm is here explored. Using a specific type of duopoly, a model is written explicity as a computer program to deal with the complex theory implicit in the process by which businesses make decisions. This model highlights our need for more empirical observations of organizational decision-making.
Two literatures exist concerning cross-border merger activity’s impact on domestic wages: one focusing on positive spillover effects; the other focusing on negative bargaining effects. Motivated by scarce theoretical scholarship spanning these literatures, we nest both mechanisms in a single conceptual framework. Considering the separate phenomena of inward and outward cross-border merger activity, our theoretical model generates three formal propositions: cross-border mergers can lead to wage increases via positive spillover effects; and negative bargaining effects are relatively more dominant when union market power is high, and when merging firms exhibit relatedness. Employing US firm-level panel data on wages combined with industry-level data on unionization and merger activity (covering 1989–2001), we find support for our propositions as inward and outward cross-border merger activity generate positive spillovers to wages, but are more likely to generate firm-level wage decreases when unionization rates are high and when cross-border merger activity is characterized as horizontal. Accordingly, future research on how cross-border mergers affect domestic wages should be mindful that both spillover and bargaining effects are at play, and that the degree of union market power and the relatedness of cross-border merger activity are critical in determining which effect dominates.
Although downsizing has become an integral part of organizational life in the U.S., there is little serious theoretical or empirical work on this issue. Nearly all of the completed work addresses the effects of downsizing, whic h usually are negative. Therefore, an important yet unanswered question is: Why do organizations downsize in the first place? In addressing this question, I offer some systematic thoughts on the causes of downsizing. Specifically, I develop a conceptual f ramework for studying organizational innovation that draws on two overlooked dimensions associated with this phenomenon, the basis of social action (rational versus arational) and social context (organizational versus extraorganizational). I then characte rize downsizing as an organizational innovation and develop propositions that explain why organizations downsize. Finally, I emphasize that empirical evaluation of these propositions will help us to understand a pivotal organizational development of recent decades.
Employee layoff decisions made during adverse economic conditions are expected to signal poor investment opportunities, but layoffs undertaken during prosperous markets should be efficiency enhancing. We examine layoffs during the global financial crisis of 2008 and compare this with an earlier period of economic prosperity. We find a positive market reaction to layoffs during rising financial markets but stock price declines following employee layoffs during the 2008 financial crisis. These price effects occur irrespective of the stated reason for the layoff and the industry of the announcing firm, and are mirrored in our robustness test of an earlier period.
While there is an extensive body of work on how organizational routines emerge and evolve over time, there is scarcity of research on what happens when routines are disrupted or disbanded through the elimination of key individuals involved in them. This study is first to theorize and empirically examine the relationship between the magnitude of workforce downsizing and firm performance applying an organizational routine perspective. Consistent with prior research on organizational routines, we posit that small-scale downsizing leads to efficiency improvements without disrupting the existing routines. While larger routine disruptions occur in both medium and large-scale downsizing, we further argue and find that large-scale downsizing tends to be more beneficial than medium-scale downsizing. Building on prior research on routines, we reason that in medium-scale downsizing employees try to still salvage the impaired, partially functioning routines, while large-scale downsizing requires a more fundamental rethinking and recreation of routines leading to more positive outcomes. Our study contributes to downsizing research through the application of the organizational routine perspective to explain the financial outcomes of downsizing. In doing so, we depart from the widely held assumption in the downsizing literature that the relationship between the magnitude of downsizing and firm performance is linear. Our study also extends prior research on organizational routines by highlighting the usefulness of conceiving routines as mindful accomplishments where the pressure to engage in path-breaking cognitive effort may lead to better results than path-dependent repairing of routines.
The incorporation of a temporal perspective in merger and acquisition (M&A) and alliance research has gained increasing popularity. Since a temporal perspective focuses on the management of time and its consequences, it contributes a unique value proposition to the M&A and alliance stream of research. Over the past 30 years researchers have explored a wide variety of topics and methodological approaches. As a result, research evidence has progressed in a somewhat fragmented manner where its cumulative impact is difficult to discern. The purpose of this review is to systematically assess the underlying logic and contributions of a temporal lens for the M&A and alliance literature as well as identify core temporal constructs, mechanisms, relationships, and promising research directions. The authors’ review of 144 published articles not only catalogs the state of the art and accumulated knowledge but also identifies critical hurdles that need to be addressed to chart future research directions.
We establish the existence of strong media slant against foreign owners. Using a unique data set from nation-wide distributed quality newspapers in Germany, we find that a foreign firm that downsizes in Germany receives almost twice as much attention than a domestic firm. This quantitative slant is accompanied by qualitative slant; newspapers report in a more negative way about downsizing foreign than domestic firms. The slant is present in all quality newspapers, but it increases from right to left in the political spectrum. This is consistent with theory papers arguing that slant is an equilibrium phenomenon. The slant we document is a clean measure for economic xenophobia; however, not geared against migrants, but against foreign owners. The slant can be a substantial obstacle to FDI, as illustrated by case studies. Our results are likely to be a lower bound estimate, because Germans are rather globalization-friendly and we are looking at quality papers, not tabloids.
Employment downsizing is a bald fact of organizational life that has become etched into the corporate culture. This chapter
begins by exploring some of the most common explanations for why downsizing happens, including its economic rationale. It
then considers when employment downsizing is appropriate, and some alternative downsizing strategies - attrition, voluntary
termination (including buy-outs), early-retirement incentives, and compulsory termination - and what to do when downsizing
outside the United States. We then consider the direct and indirect costs of employment downsizing, in the short term as well
as in the long term, as well as its effects on the broader economy and on the organization itself, including subsequent firm
performance and innovation.
Deinstitutionalization refers here to thc erosion or discontinuity of an institutionalized organizational activity or practice. This paper identifies a set of organizational and environmental factors that are hypothesized to determine the likelihood that institutionalized organizational behaviours will be vulnerable to erosion or rejection over time. Contrary to the emphasis in institutional theory on the cultural persistence and endurance of institutionalized organizational behaviours, it is suggested that, under a variety of conditions, these behaviours will be highly susceptible to dissipation, rejection or replacement.
During the 1980s a large number of firms refocused or down-scoped using multiple divestitures. This paper reviews recent empirical research (1983-1996) to isolate and identify the antecedent conditions that lead to downscoping and its outcomes. Antecedent conditions include changing environmental conditions, firm governance, ineffective strategy, poor performance, and financial restructuring. Outcomes of the process examine how firm strategy has changed and its effect on employees and firm performance. I develop a model to classify research into topic areas and discuss future research directions and related issues.
Recent empirical research in finance has uncovered two families of pervasive regularities: underreaction of stock prices to news such as earnings announcements, and overreaction of stock prices to a series of good or bad news. In this paper, we present a parsimonious model of investor sentiment, or of how investors form beliefs, which is consistent with the empirical findings. The model is based on psychological evidence and produces both underreaction and overreaction for a wide range of parameter values.
Purpose
The purpose of this paper is to compare the market reaction to layoff announcements of union and nonunion employees.
Design/methodology/approach
Event study methodology was utilized to assess the effects of layoff announcements of union versus nonunion employees. The union status of the laid‐off employees was determined for 135 layoff announcements reported in the Wall Street Journal in 1993 and 1994 and shareholder returns between the two groups was compared.
Findings
Over each event period tested, the market reaction was more negative when nonunion employees were downsized than when the announcement concerned unionized employees. Over the two days surrounding the announcement, the market reaction to the layoff announcement of unionized employees was actually positive, while the reaction was negative when nonunion employees were the subject of the announcement.
Research limitations/implications
The sample included layoff announcements from 1993 and 1994 only. The market reaction to announcements in different years might be different.
Originality/value
While many papers have examined the market reaction to layoff announcements, this is the first paper that compares the reaction to union versus nonunion employees.
This study examines the role of downsizing in the deinstitutionalization of permanent employment among publicly listed companies in Japan between 1990 and 1997. We found that although economic pressure triggered downsizing, social and institutional pressures shaped the pace and process by which downsizing spread. Large, old, wholly domestically owned, and high-reputation Japanese firms were resistant to downsizing at first, as were firms with high levels of human capital, as reflected by high wages, but these social and institutional pressures diminished as downsizing spread across the population. We argue that this breakdown of social constraints was due to a safety-in-numbers effect: as downsizing became more prominent, the actions of any single firm were less likely to be noticed and criticized, and the effect of the institutional factors that once constrained downsizing diminished.