Dealing with Retrenchment in Times of Crisis: Contingent Effects of Knowledge Intensity

Abstract

We examine two forms of labour cost retrenchment strategies, flexible and rigid retrenchment strategies. Guided by the resource- and capability-based view of the firm, we focus on two important questions: One, what are the different effects of flexible and rigid strategies on organizational outcomes in terms of market reactions to the announcements of these strategies? Two, how does the knowledge intensity such as a firm’s reliance on knowledge assets and capabilities shape the relationship between flexible and rigid strategies and organizational outcomes? To answer these questions, we use a novel data set from 242 retrenchment announcements from publicly listed Japanese companies during the last severe economic crisis (2008-2009). Our results suggest that market reaction is shaped by the choice of the retrenchment strategy, and the firms’ dependence on its knowledge intensity. Firms which practice flexible retrenchment strategies show positive market reactions, while the opposite holds true for firms with rigid retrenchment strategies. On the other hand, market participants evaluate rigid retrenchment strategies much more negatively if they threaten knowledge assets and capabilities. Our evidence suggests that resource- and capability-based contingencies matter when firms need to carry out retrenchment strategies.