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Downsizing in a downturn – does acting fast help you in the long run? Part one

Looking at downsizing and upsizing we focus on two important questions. One, are the antecedents of restructuring common across downsizing and upsizing? And two, are the performance consequences of such restructuring related to prior firm performance?

To answer these questions, we use primary data from companies listed on the New York Stock Exchange over a 37-year period (1980–2016).

Our results suggest that six key antecedents play a prominent role in both downsizing and upsizing, although they differ in magnitude and direction in how they affect each form of restructuring. Evidence also indicates it is not just current-year performance but also the trend in company performance over the prior two years that forecasts subsequent firm performance.

What’s new?

A common set of factors precede restructuring decisions. They reflect efficiency considerations (company performance and managerial foresight) and institutional forces (the economy, political uncertainty, industry and technology). 

According to research recently published in the Academy of Management Journal, organisations that are quick to reduce headcount in an economic downturn fare worse, at least for two years after the event, than competitors who hold off on redundancy. 

Because companies that comprehensively downsized assets and employees later (so-called combination downsizers) fared better, it is possible that they implemented other strategies first, such as furloughs or pay cuts, or that they implemented a measured combination of layoffs and asset sales, or even navigated tough economic times by operating at a loss.

But how much better did they do? Over the following two years, stock-market returns for companies that held onto staff for longer, choosing other strategies first such as furlough, pay cuts, a combination of redundancies and asset sales, or operating at a loss yield the highest returns at 45.08%. By contrast, making redundancies and not exploring other options yields the lowest returns at 7.49%. 

When upsizing, choosing to increase both employees and assets yields the lowest subsequent two-year returns (-19.74%), while simply increasing the number of employees yields the highest returns (5.99%). 

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Key findings

Six key preceding factors played a prominent role in both downsizing and upsizing employees and assets. In order of importance, they are.

1- Company performance

Unsurprisingly firms that are doing well are likely to upsize and companies that perform poorly tend to downsize. Underperforming organisations tend to cut staff first, then assets, then a combination of both. When companies do well, they typically hire more people first, then acquire more assets later.

2-Managerial foresight

Business leaders make judgments on how to proceed on hiring, firing or acquiring based on the company’s prospects and its ability to compete. A positive management outlook discourages downsizing and encourages upsizing.

3-The economy
Economic cycles, market collapses and declines in demand are triggers for restructuring. A well-performing economy discourages downsizing and encourages upsizing.

4-Political uncertainty

When political discord is high, companies might decide to downsize because of potential volatility. It also discourages upsizing.


Is the company’s industry being affected by deregulation and privatisation? The study compared banks to banks, pharmaceutical companies to pharmaceutical companies, tech firms to tech firms, and so on, enabling researchers to compare each company’s performance within its own industry.

Is technology enhancing efficiency and affecting the need for employees and assets? 


Check back tomorrow for part two of this different slant for turning this research into reality.

Wayne F Cascio is professor emeritus at the University of Colorado and consulting editor of the Journal of International Business Studies, Arjun Chatrath is professor of finance at the University of Portland’s Pamplin School of Business and Rohan Christie-David is dean of the College of Business at Texas A&M University San Antonio.


This piece appears in the September/October 2021 issue of HR magazine. Subscribe now to get all the latest issues delivered to your desk.