Downsizing implementation and financial performance

In the present study we explore the relationship between downsizing decisions and corporate financial performance after top management has decided to downsize. Our focus is on the financial consequences arising from the amount of downsizing and the use of disengagement incentives. For this purpose, we use a sample of downsizing announcements in the Spanish press from 1995 up to 2001. Although the results show that the amount of downsizing is not significantly related to post-downsizing profitability, the evidence provided supports the finding that the use of disengagement incentives (which motivate workers to leave the organization) is negatively related to firm performance. Our analysis helps to understand the role that strategic downsizing decisions play in explaining observed variance in the performance of downsized firms. Thus, it advances scholarly organizational research by reinforcing the concept that corporate performance is not only contingent on strategies, but also influenced by the means through which these strategies are implemented.