New Evidence regarding Organizational Downsizing and a Firm's Financial Performance: A Long-Term Analysis *

During the current economic turbulence facing corporations, executives are searching for strategies that will enable the organization to survive and potentially grow. One approach many companies are employing to cope with the hostile and dynamic environment is organizational downsizing. Recently, international companies such as General Electric, Lucent Technologies, General Motors, Fujitsu, American Airlines, Boeing, and British Airways have announced major layoffs. Likewise, downsizing has spread to the "dot corns" (e.g., Priceline, AOL) and other high technology companies (e.g., Sun Microsystems, Hewlett-Packard, JDS Uniphase, Cisco Systems). According to the Bureau of Labor Statistics, downsizing activities in the United States have exceeded two million job cuts in both 2001 and 2002 ("Mass Layoff Statistics," 2002). Several articles in the business press have extolled the benefits of organizational downsizing (Byrne, 1994; Fuchsberg, 1993; Koretz, 1997). For example, it has been proposed that downsizing (a) reduces operating costs, (b) eliminates unnecessary levels of management, (c) streamlines operations, (d) enables an organization to prune deadwood, (e) enhances overall effectiveness, and (f) ultimately, makes a company more competitive in today's marketplace (Collins and Rodrik, 1991; Jensen, 1986; McKinley et al., 1995; Neinstedt, 1989). However, several authors also maintain that downsizing can have a negative effect on organizations, such as (a) reducing profits, (b) slowing dividend growth, (c) lowering stock prices, (d) decreasing employee morale and satisfaction, (e) increasing tardiness, absence, and turnover, and (f) escalating employee workloads, stress, and company health care expenses (De Meuse and Tornow, 1990; Gombola and Tsetsekos, 1992; Mishra and Spreitzer, 1998; Noer, 1993; Pfeffer, 1998; Reich, 1993; Worrell et al., 1991). In addition, recent authors contend that downsizing disrupts or damages an organization's ability to learn and adapt to the changing environment because the informal communication networks are adversely affected (Fisher and White, 2000; Lei and Hitt, 1995). Despite the frequency in which downsizing has been implemented, there are very few, if any, scientific data organizational leaders can point to that support the efficacy of this strategy (see De Meuse and Marks, 2003). It may be that executives simply assume the overall benefits out weigh the costs. Or upper-level managers may perceive that they have no alternative (i.e., if they do not cut costs immediately, their companies will not survive). On the other hand, it may be that executives simply have jumped on the downsizing bandwagon, like they have done with so many other management fads (e.g., re-engineering, quality circles, cell manufacturing, t-group training). As researchers, collecting data in companies that downsize is exceedingly difficult. Executives frequently are unwilling to share their financial and operational data with outside parties. In addition, executives often are reluctant to have researchers scrutinize their managerial decisions. Legally, organizations are hesitant to make public information on personnel-related decisions. Consequently, many questions remain concerning the financial effectiveness of organizational downsizing. For example: 1. Does downsizing really work? That is, do companies that downsize financially out-perform companies which do not? 2. Do companies that implement a "deep cut" perform differently than those companies that implement a "small cut"? 3. Do companies that downsize multiple times perform differently than those that do not? The primary purpose of this study is to systematically examine the relationship between the strategy of downsizing and financial performance over an extended period of time. A secondary objective is to investigate the magnitude and frequency of downsizing and its impact on various financial indicators. …