Rationalizing corporate downsizing with long‐term profitability – an empirical focus

This research empirically tests the rationale of corporate downsizing of employees as a cost reduction strategy on the long‐run profitability of a corporation. The sample for this study consisted of 185 large publicly‐held US‐based corporations which announced their intentions to downsize during the period 1990‐1992. Over the subsequent ten‐year period (1992‐2001) their returns on investment were obtained and the empirical relationship between downsizing and long‐run profitability was determined. Whether organizations that undergo this type of change appear to be better off than they were before they implemented the process was the focus of this study. The study ascertained that downsizing does not appear to be in the best long‐term interest of the corporation, its employees, or its shareholders, and that the massive job cuts did not lead to strong sustained gains in the price of the stock. Many organizational benefits fail to develop as expected and the benefits are elusive. The findings of this study suggest downsizing does not engender a long‐run productivity gain and it fails as a method to boost shareholder value.