Investor Information Processing and Workforce Downsizing Performance

Abstract

Prior research has shown that, on average, investors respond negatively to workforce downsizing announcements. To extend this line of work, we seek to more deeply explore investor information processing that helps explain variations in the magnitude of negative investor responses across time and industries to workforce downsizing announcements. To do so, we theorize and empirically analyze how the extent to which major past, current and future informational cues on firm, industry and macro-economic levels condition the relationship between workforce downsizing and investor response. In particular, we focus on how the current industry downsizing intensity, future macro-economic outlooks, and a firm’s prior financial performance influence the relationship between downsizing and investor response. In line with predictions of imitation theory, we find that negative investor responses to downsizings are amplified in periods of industry downsizing waves, in the face of poor macro-economic outlooks, and subsequent to poor firm financial performance development. Additionally, our empirical results suggest that these three contingency factors on firm, industry, and macro-economic level can have a significant, compound effect on downsizing firms’ market valuations.