Employee downsizing, financial constraints, and production efficiency of firms

Abstract

This study examines the effects of employee downsizing strategies on production efficiency of firms by applying the stochastic frontier analysis. Using Taiwan’s manufacturing firms over the financial crisis period of 2008–2015 as the sample, we show that employee downsizing enhances the contemporaneous production efficiency of firms. Downsizers also have continuous efficiency improvement in the post-downsizing phase. The increase in efficiency is particularly significant for firms that implement downsizing with concurrent asset reduction or repeated episodes. Evidence also indicates that financially constrained firms have a greater tendency to downsize. Downsizing firms that face less financial constraints can have better production efficiency than others. We suggest that adequate financial resources for supporting complementary practices are necessary to achieve higher efficiency through employee downsizing.