Downsizing to the wrong size? A study of the impact of downsizing on firm performance during an economic downturn

Abstract

This study extends research on downsizing strategies and influences of an economic downturn to examine the relationship between downsizing strategies and firm performance, and to clarify how a firm's downsizing strategies interact with an economic downturn to affect firm performance. Offering models predominantly based on network, efficiency wage and organization theories, this study tests hypotheses using the Taiwan Economic Journal Financial Data Bank to collect data on 436 listed Taiwanese companies from 2005 through 2009 to examine the impacts of three popular downsizing strategies – layoffs, pay cuts and organizational slack reductions – on firm performance. The results indicate that downsizing may not always be the appropriate strategy for improving firm performance because downsizing with layoffs and reduction of organizational slacks may leave the firm at an inappropriate size, thus, negatively affecting firm performance, while downsizing on pay cuts may not negatively affect firm performance, but it may not be an effective strategy to use in the face of an economic downturn. These findings provide researchers and business practitioners with evidence about firms' responses to an economic downturn and the effectiveness of downsizing strategies for improved performance from a multidimensional perspective.