Market reactions to announcements of corporate downsizing actions and implementation strategies

Abstract

Abstract This study examines the effects of downsizing actions and implementation strategies on market performance. While downsizing actions reduce costs, they also produce a loss of valuable human capital that can exceed the benefits resulting from the lay‐offs. In support of this argument, the results showed that downsizing had a negative effect on market returns and the effects grow increasingly negative with larger downsizing actions. However, the market reacts more positively to downsizing actions when reallocation strategies are used and to large downsizing actions when disengagement incentives are applied. The results of this research suggest the importance of carefully managing valuable resources to create positive returns. Copyright © 2004 John Wiley & Sons, Ltd.