The Financial Performance of Downsizing Firms: A New Perspective

10.6292/AFPF.2011.04.03

Brett King；Carolyn Carroll

Downsizing ； Event study ； Financial performance

Advances in Financial Planning and Forecasting

4期（2011 / 03 / 01）

59 - 76

英文

Corporate downsizing can be an effective managerial strategy to increase efficiency and profitability. However, the stock market reaction to a downsizing announcement is not always favorable. In many instances, a downsizing announcement is met with a negative revaluation of the firm's stock, while other announcements receive a positive market response. In an effort to explain these different stock price reactions, we provide a more exhaustive analysis of the financial performance of downsizing firms than has been resented in the literature to date. We examine all firms which downsized during the 1990-2002 time period. These firms are then classified as either proactive or reactive based on the stock market's reaction to the downsizing announcement. The proactive firms appear to be very profitable, highly efficient firms. We find that for these firms, the decision to downsize in anticipation of declining sales and by doing so, mitigate this problem before it impacts the firm's basic earning power. Reactive firms, while also profitable and efficiently run, do not have the same financial strength as the proactive firms to face economic downturns. These firms have below industry-average interest coverage ratios. Thus, their decision to downsize is more reactionary, and not perceived by the market the same as firms who proactively downsize. Furthermore, the layoffs for the reactionary firms are apparently insufficient to improve their future financial performance. Our study attempts to shed new light on downsizing announcements and the different market reactions to these announcements.

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