Downsizing and Financial Performance: A Multi-level and Longitudinal Meta-Analysis

Abstract

Controversy over downsizing’s financial performance outcomes, paired with its ongoing pervasiveness in practice, motivates a meta-analysis on the downsizing-financial performance relationship and vice-versa. Using recent meta-analytic techniques developed specifically for multi-level, longitudinal data, this study assesses the size and direction of both within- and between-firm effects, while also testing for organizational, methodological, and temporal moderators. The results from 894 effect sizes in 113 sources show that between-firm financial performance shortfalls exceeding one year are more likely to influence downsizing adoption than within-firm performance decline over the same period. Both within-firm market and accounting performance suffer in the period immediately surrounding the downsizing event, while post-downsizing financial outcomes are generally negative and, at best, highly heterogenous and centered around zero. We find positive managerial perceptions toward downsizing’s financial outcomes, which supports a sociocognitive perspective of downsizing – whereby managers believe downsizing is effective, despite empirical evidence to the contrary. We critique the practical implications of the findings, arguing that downsizing is not always the necessary evil many believe it to be, and offer directions for future downsizing research.