Sales Force Downsizing and Firm-Idiosyncratic Risk: The Contingent Role of Investors' Screening and Firm's Signaling Processes

Abstract

Although sales force downsizing represents a challenging marketing resource change that can signal uncertainty about future firm performance, little is known about its impact on financial-market performance. Drawing from information economics, the authors address this knowledge gap by developing a comprehensive framework to (a) examine the impact of the size of a firm's sales force downsizing on firm-idiosyncratic risk, (b) uncover investor's screening processes that influence this relationship, and (c) identify firm's mitigating signaling processes that can alleviate investor uncertainty linked to downsizing. The authors draw from several secondary sources to assemble a longitudinal dataset of 314 U.S. public firms over 12 years and model their framework using a robust econometric approach. Findings show that larger sales force reductions are associated with greater firm-idiosyncratic risk. Furthermore, this increase in risk is amplified when firms (a) face high levels of future competitive threats; and ...