The effect of explanations and CEO presence on stock market reactions to downsizing

Abstract

PurposeThe purpose of this paper is to examine whether the type of explanation (excuses, justifications, apologies and denials) provided for downsizing and the source of the announcement (CEO vs other organizational members) influences shareholders’ market reactions to downsizing announcements.Design/methodology/approachIn total, 388 media-based downsizing announcements from 2006–2015 were coded for explanation type and source of message. Cumulative average return was used to assess the impact of downsizing on market reactions the day after the announcement.FindingsAs predicted, and consistent with predictions drawn from fairness theory, excuses triggered positive market reactions, whereas justifications, apologies and denials triggered negative reactions. Additionally, shareholders reacted more negatively to excuses and apologies when the announcement came from CEOs vs other organizational members.Research limitations/implicationsThe current research bridges the literature on market reactions to downsizing with the organizational psychology literature to advance a novel theoretical framework for predicting shareholders’ reactions to downsizing announcements. In doing so, the authors provide a more refined understanding of why different types of explanations may differentially influence shareholders’ reactions. The current research also sheds light on when the presence of the CEO in downsizing announcements may have potentially negative consequences for organizations.Originality/valueThe findings contribute to the sparse literature examining variations in the content of downsizing announcements on shareholders’ reactions. The present research is also the first to examine whether shareholders would react less negatively if downsizing explanations came from top organizational leaders (e.g. CEOs).