Effect Of downsizing on the financial performance

on the firms of Pakistan

INTRODUCTION

Background
Some of the previous years economy was down and recession was dominent
on economies. So as the economy is related to employment and all other
flourishing activities. Due to the recession a number of peoples were
fired from there jobs. So the number of obless peopls increased
caausing increased umemplyement.
As we kknow that umemployment means when people are without jobs
and they have actively looked for work within the past four weeks.The
unemployment rate is a measure of the prevalence of unemployment and
it is calculated as a percentage by dividing the number of unemployed
individuals by all individuals currently in the labour force.

Rationale of the Study

Many firms have come to enjoy positive effect downsizing brought

for them. There have been many cases for instance Among Korean
firms, a representative success story related to the downsizing
effect comes from Samsung Electronics, which is one of the most
successful companies in Korea (Gyu-Chang Yu & Jong-Sung Park,
2006).

Despite a few successful cases of downsizing, however, the real

effect

of

employee

downsizing

on

productivity

is

an

firms

financial

empirical

performance

question.

In

fact,

and
we

cannot disregard hidden figures about the number of employees in

many cases.(Gyu-Chang Yu & Jong-Sung Park, 2006).
The purpose of this research paper is to investigate the effect
downsizing has on the financial performance of the firms in
Pakistan in terms of profitability and efficiency. AS it is
important for the all the strategic planners of the firms, the
investors

and

strategy

will

many

shareholders

bring

respective firms.

positive

to
or

be

aware

negative

if

the

effect

adopted
for

the

Problem Identification

Downsizing is one the most significant decision the firms has to

make. Downsizing, re-organizing, restructuring or as many call it
as lay-off results with the same result of unsatisfied pool of
employees. For long, downsizing has been considered as a social
problem and many raise issues and question it on the basis of
ethical grounds even.
There have been many researches done with the prime focus of the
downsizing effect on the human resource or other variables. Even
in Pakistan literature related to downsizing will be entirely
focusing on the consequences the downsized employees or laborers
are and will be facing.
Until
focused

recently,
on

micro

previous

research

individual

downsizing

on

departing

downsizing

on

survivors.

on

issues

employees
(Gyu-Chang

downsizing

such
or

as
the

Yu

&

the

has

mostly

effect

of

consequences

of

Jong-Sung

Park,

2006).There has thus been minimum attention towards its effect on

the financial performance. There have been little attention set
towards its impact on the profitability of the firm, will it be
impacting it positively or not.

Problem Statement

This

research

investigates

and

analyzes

the

effects

of

unemployment on the financial stability in terms of econmical

growth and recession. This esaerch

aims to examine the impact of

unemployemnt with the help of

Research Question

is uneploymnet an indicaation of economic receesion?

Objectives of the Research

This research aims to examine the effect downsizing has on the

financial performance of the firms of Pakistan. The objectives of
this research are:

To

find

the

effect

of

downsizing

on

firms

in

terms

of

Profitability ,Efficiency & Employee Productivity

To determine whether downsizing will affect the financial ratios

of the firms

To determine whether downsizing will affect net profit margins.

Resources
The resource includes financial journals, financial data records
of the selected firms, internet and books.
Limitations

The initial limitation for this research is that of the limited

budget and time available. Secondly, in order to measure the
financial

performance

of

the

firm

affected

various

financial

ratios will be taken into account. Thus the limitations will be

mostly associated to it.
In Pakistan most firms are least concerned with making detailed
financial recordings based on the ratios making it more difficult
for comparative analysis. Since the research will include face to
face

interviews

it

might

be

possibility

of

it

not

being

exaggerating

their

authentic most of the times.

There

is

greater

chance

of

management

respective financial figures thus the financial ratios might not

be accurate and might end up affecting the overall research
result. The sample size is limited and might again affect the
results.

There

are

many

large

firms

which

are

engaged

in

multiple lines of business. (Eugene Brigham, 2007). Thus it will

be difficult to identify their industry groups to which the
respective firm belongs. So comparing and analyzing their ratios
with each other may end up disrupting the result.

Scope of the Research

The

research

analyzes

the

effect

downsizing

has

on

the

financial

performance of the firms. The research is descriptive collecting data

from secondary sources. Thus the trend observed during the last five
year period of the selected major firms of Pakistan will guide and
help the financial managers for future implementations in order to
maximize the financial return.

Downsizing

is more effective when a firm implements it proactively,

and less effective when a firm implements downsizing after a financial

loss as a quick fix to a financial problem (Gyu-Chang Yu & Jong-

Sung Park, 2006)

LITERATURE REVIEW
Firms have faced long-term recession around the world and tried
to find out ways to improve corporate profitability and save
themselves from financial collapse. Downsizing is currently one
of the most critical issues for many firms around the world.
Downsizing

can

be

defined

as

an

involuntary

employment

adjustment that firms intentionally implement for the purpose of

improvement of organizational performance (Gomez-Mejia et al.,
2004).
While many downsizing initiatives are obvious attempts to cut
expenses and improve earnings (Iqbal and Shetty, 1995), the
reality is that profitability does not necessarily follow. For
example,

an

downsizing

often-cited
is

the

Wyatt

study

on

the

consulting

financial

firms

impacts

survey

of

of

1,005

downsized companies.
They found that only 46 percent of the companies achieved their
expense-reduction
degree

goals,

anticipated,

improving

return

on

21

32

percent

percent

investment

met
and

increased
their
22

to

the

expectations

for

percent

profits
reached

their

targets for increased productivity. (Bennett, 1991).

There are large variations of the actual implementation processes
of downsizing between western and Asian firms due to different
social and institutional constraints and different organizational
and human resource practices.

Since, unlike the western countries the social and institutional

constraints

for

lifetime

employment

in

Asian

countries

have

rapidly diminished with global competitive

economic pressure (Ahmakjian and Robinson, 2001; Mroczkowski and
Hanaoka, 1997; Kitt, 2003).
This led Asian firms to follow western human resource practices
such as pay-for-performance and individual incentives as well as
downsizing. For example, many Japanese firms increasingly adopt
the

downsizing

practice

as

strategic

means

for

corporate

restructuring (Mroczkowski and Hanaoka, 1997).

Several

studies

in

the

management

literature

have

examined

downsizing adopted. Although many researchers did not find any

significant

change

in

the

financial

performance

of

downsized

firms but there are still many cases which prove it otherwise.
For example, Samsung Electronics made about $6.0 billion in
profits and $34 billion in sales with about 45,000 employees in
2002, compared to $1.2 billion in profits and $13 billion in
sales with about 60,000 employees in 1996. Its stock price also
soared from $83 in 1996 to $420 in 2004, a five-fold increase.
(Gyu-Chang Yu & Jong-Sung Park, 2006).
Many

managers

blame

poor

economic

conditions

and

foreign

competition for the decline in performance (PETER.J.CARSWELL,

2005)

if

there

is

any

and

not

due

to

the

downsizing

done.

Further, Firms that combined reduction in employees and asset

restructuring had higher return on assets and stock returns when
compared to other firms in their own industry.( REZA ESPAHBODI,
TERESA A. JOHN & GOPALAVASUDEVAN,2000).

Researchers

have

identified

many

consequences

of

downsizing

including reduced workforce, ethical problems and unemployment

boom. However there have been many researches which highlighted
the impact of downsizing on both the financial and organizational
performance.
According to many, downsizing has brought both negative and
positive effect on the financial performance varying from firm to
firm.

First

and

more

importantly,

negative

results

of

the

downsizing effect have mostly come from studies that have focused
on capital market outcomes, i.e. stock prices (Worrell et al.,
1991; Cascio et al., 1997; Lee, 1997; Hallock, 1998; Chen et al.,
2001; Chalos and Chen, 2002).
While De Meuse et al. (1994); Suarez-Gonzalez (2001) and Cascio
and Young (2003) found a negative impact from downsizing on
financial
(2000)

and

and

organizational

Chen

et

al.

performances,

(2001)

found

Espahbodi

positive

et

effect

al.
from

downsizing on organizational performance.(Gyu-Chang Yu & JongSung Park, 2006).

However

it

literature

should
on

the

be

noted

effect

that
of

after

much

downsizing

on

of

the

the

present

financial

performance there is still ambiguity in the findings in terms of

the diverse experiences of multi-national and indigenous firms in
other parts of the globe, especially emerging market economies in
Asia.( Gyu-Chang Yu & Jong-Sung Park, 2006).

With increasing information and access to global markets, there

is

ever

increasing

need

for

the

corporations

to

be

more

competitive. Unfortunately, because of low literacy rate, and

lack of technology usage as a result of little or no HRD efforts,
the skill level and the productivity of the Pakistani work force
have been lower than that of most competitors. Thus with time
the use of technology coupled with cost cut measures has lead to
downsizing (Zaheer Baig, 2005) in many firms of Pakistan.

METHOD
Sample
The sample size will be 25 firms of Islamabad and Rawalpindi. The
sample population for this research will include all the firms
that are major Pakistani companies in terms of sales revenues,
the scale of the number of employees, reputations, and so forth.
Financial institutions such as banks & insurance companies are
not included in the research. Firms with missing financial data
will also be excluded from sample.

Instrument and Measures

This

research

questionnaire

will
will

be
be

based

on

distributed

secondary
and

sources.

instead

Thus

financial

no

data

including current and past records will be examined and made use
of. The data collected will be based on the financial data of the
last five year records. The paper will investigate the relationship
between downsizing and three measures of financial performance and two
measures

of

assets,

asset

employee,

and

organizational
turnover,
value

operating

added

variables of the research.

performance
per

income

employee.

which
per

includes

return

on

employee,

sales

per

These

are

the

dependent

The firms with the positive financial ratios will be marked as

the profitable sample and the ones with the negative financial
ratios will be marked as the non profitable. Firms with missing
financial data will be excluded. Non downsized firms will be
taken as control sample and later both results of the downsized
and non downsized firms will be compared and analyzed to examine
the differences and similarities.
Downsizing

rouses

the

expectation

of

the

investors

who

assumes that the downsizing can bring the financial health to the
firms t hat implemented downsizing. (Tomonori Tomura. ,2002).
Thus along with this the stock prices of both sub samples will
also

be

taken

into

account

for

the

research.

With

the

data

collection, the past research papers based on the topic will also
be taken into account.

Procedure
With the selected firms of Rawalpindi and Islamabad, various
financial ratios and average net profit margins will be analyzed.
The data of the downsizing firms will be compared with the data
of the non-downsizing companies based on the average net profit
margins. Statistical tools including timeline graphs and others
will

be

constructed

and

made

use

of

to

help

determine

the

respective effects and a comparison between the downsized and non

downsized firms will be done.
Research papers of different authors related to the topic will
be examined and compared with the results of this research. The

change in the rates of the stock prices of the downsized firms

and

non

downsized

firms

will

be

collected

determining the respective profitability.

and

examined

for

REFERENCES

Gyu-Chang Yu & Jong-Sung Park. (2006). The effect of downsizing

on the
financial performance and employee productivity of Korean
firms. International Journal of Manpower.27 (3), 230-250.
PETER J. CARSWELL. (2005). The Financial Impact of Organizational
Downsizing PracticesThe New Zealand Experience. Asia Pacific
Journal of Management.22 (2005), 41-63.
REZA ESPAHBODI, TERESA A. JOHN & GOPALAVASUDEVAN. (2000). The
Effects of Downsizing on Operating Performance. Review of
Quantitative Finance and Accounting.15 (2000), 107-126.
Tomonori Tomura.(2002). Effects of Downsizing on Corporate

Financial Performances in Japan. Retrieved on April 7, 2010,

from www.google.com
Zaheer Baig.(2005).Employer-Employee Relationship in Pakistan.
Market Forces.1 (2)
Eugene Brigham. (2007).Financial management theory & practices
(12th Ed.), Financial Analysis. (Pp.20-33).