To Downsize or Not to Downsize – What Does the Empirical Evidence Suggest?

Document Type

Peer-Reviewed Article

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Purpose: There has been much written about the effects of downsizing on the financial health and the valuation of companies that engage in this practice. But this literature is fragmented, focusing on various aspects of companies, various reasons for downsizing, and various financial and market outcome measures. The present study was conducted to try and address some of this fragmentation by comparing those companies that downsized in 2008, whether financially healthy or not, with those companies that did not downsize. Design/Methodology/Approach: The impact of the downsizing event was assessed by using various financial measures as well as a measure of company valuation over the short-term (2009-2011) and long-term (2009-2014). Findings: Findings indicate that across all financial measures, except Return on Equity, downsizing makes no difference to the financial health of a company either in the short term (up to 3 years after the downsizing) or in the long-term (up to 6 years after the downsizing). And with regards to Return on Equity, downsizing companies did more poorly immediately after the downsizing in efficiently using their equity. Practical Implications. Originality/Value: The hope is that this work will better inform, not only scholars, but also senior leaders faced with a decision to downsize or not to downsize.