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, the authors posit that scholars should account for the temporal nature of this strategic decision to understand its economic impact on the firm’s operations. Therefore, the purpose of this paper is to provide a more rigorous empirical examination of how a firm’s decision to downsize its workforce affects that firm’s long-term value.
The authors 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 and 2018, the authors tested the main effect of downsizing on LIVA and three boundary condition hypotheses.
The authors 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 our expectations, the authors 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.
With these findings, this paper sheds light on the long-term implications of a firm’s decision to downsize its workforce.
