Does size matter? The impact of the size of downsizing on financial health and market valuation

Abstract

Purpose

Although the management and financial literature is replete with much research looking at the impact of downsizing on the financial health and market valuation of companies employing this practice, there has been very little attention paid to the size of the downsizing effort and its impact. The purpose of this paper is to try and address this lack by looking at companies that downsized in 2008, considering the relative size of the downsizing, and the ongoing financial health and market valuation of the companies.

Design/methodology/approach

The impact of the size or severity of the downsizing event was assessed using various financial measures as well as a measure of market valuation from one to five years after the downsizing event. A data set of 251 companies that were in the Fortune 500 in 2014 and also in the Fortune 500 in 2008, that either did not change or decreased headcount were assessed longitudinally over a five-year period.

Findings

Findings indicate that the size or severity of the downsizing did not impact any measures of profitability or efficiency or market valuation, with one exception. The size of the downsizing event was negatively related to return on investment, one year after the downsizing. On the other hand, the size or severity of the downsizing had a positive relationship on the companies’ ability to have enough cash at hand to cover expenses (current ratio) from one to four years after the downsizing.

Originality/value

This work may provide additional support for the “band-aid solution” theory of downsizing, as suggested by Carriger (2016), downsizing may stop the bleeding but does not address the underlying financial or strategic issue leading to the need to downsize. The hope is that this work will better inform scholars and practitioners, providing a more nuanced picture of the impact of downsizing on corporate financial health and market valuation.

Citation

Carriger, M. (2017), "Does size matter? The impact of the size of downsizing on financial health and market valuation", Journal of Strategy and Management, Vol. 10 No. 3, pp. 313-325. https://doi.org/10.1108/JSMA-05-2016-0033