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MD
52,8
Assessing longitudinal
relationships between financial
performance and downsizing
1474 Nita N. Chhinzer and Elliott Currie
Department of Management, University of Guelph, Guelph, Canada

Abstract
Purpose – The purpose of this paper is to suggest that divergent financial performance triggers
different rationales for the decision to downsize (excuses, justifications, apologies or denials) and that
organizational financial performance post-downsizing varies based on the initial downsizing rationale.
Design/methodology/approach – A mixed methods approach paired content analysis of 178
downsizing announcements from 2005 to 2011 with organizational financial data pre and post-downsizing
event. Paired sample t-tests determined mean differences in organizational financial performance pre- and
post-downsizing based on six commonly used organizational performance measures (accounting and
human resources metrics). Longitudinal performance trends were evaluated using event history analysis.
Findings – Organizational experiencing both financial growth and decline engage in downsizing,
but organizational financial performance varies based on downsizing rationale. For example,
organizations engaging in excuse-based downsizing experienced significant levels of volatility and
decline pre-downsizing, but growth post-downsizing. However, organizations engaging in
justification-based downsizing experienced financial decline pre-downsizing, but no significant
additional decline post-downsizing.
Research limitations/implications – Collection of information over multiple business or economic
cycles, or categorizing organizations based on industry, organizations size or number of employees
may provide additional information on the relationship between downsizing and organizational
financial performance.
Practical implications – Organizational performance pre- and post-downsizing varies based on
downsizing rationale. Additionally, metrics used to evaluate downsizing success or failure should be
considered carefully.
Originality/value – The authors help explain divergent results in existing research on the
relationship between downsizing and organizational financial performance by identifying downsizing
as a multi-dimensional event. The study indicates that organizational experience both financial
growth and decline engage in downsizing, but rationalize the downsizing differently (according to
social accounts).
Keywords Uncertainty management, Downsizing, Organizational restructuring,
Human resource accounting, Layoffs, Organizational decision making
Paper type Research paper

Downsizing refers to a “planned set of organizational policies and practices aimed at

Management Decision
Vol. 52 No. 8, 2014
pp. 1474-1490
r Emerald Group Publishing Limited
0025-1747
DOI 10.1108/MD-05-2014-0280
workforce reduction with the goal of improving firm performance” and has emerged
as an integral element of organizational life (Datta et al., 2010, p. 282). An inherent
assumption in the downsizing decision is that firms aim to maximize operational
efficiency by reducing costs, and thus choose to downsize as an effort to decrease
labour related costs (Datta et al., 2012). Both practitioners and scholars are keen to
examine how employee downsizing affects organizational financial performance
(Guthrie and Datta, 2008; Vermeulen, 2009; Chhinzer and Ghatehorde, 2010).
However, empirical evidence provides inconsistent results on the relationship between
downsizing and organizational financial performance. Consequently, a recent review of
causes and consequences of downsizing highlights the lack of research examining both
antecedents and consequences of downsizing in a single theoretic framework Financial
(Datta et al., 2010). performance and
We posit that the rationale used for downsizing indicates a larger contextual element
to be considered when evaluating the relationship between organization financial downsizing
performance and downsizing; such that divergent financial performance triggers
different rationales for the decision to downsize. In addition, we suggest that the
rationale that triggered the downsizing event results in varying organizational financial 1475
performance post-downsizing. We propose that downsizing is a multi-dimensional event.
Downsizing events can be disaggregated based on the explanation provided for the
downsizing decision, which can help make sense of the inconsistent relationship between
organizational financial performance and downsizing in research to date.
This research provides a current assessment of downsizing causes and
consequences through the use of a sample of 178 organizations that announced job
cuts from 2005 to 2011. Specifically, we use psychology theories to posit that the
explanation provided in the downsizing announcement can be categorized into social
accounts (excuses, justifications, apologies or denials) and include an assessment of the
initial reason for the downsizing as a determinant on the intent and impact of
downsizing on organizational financial results. Thus, this research provides an
interdisciplinary evaluation (financial management, human resources management
and psychology) of this common organizational phenomenon.
First, we present a literature review highlighting the nascent body of research
examining the relationship between downsizing and organizational variables, with a focus
on financial performance variables. Next, we develop hypotheses regarding organizational
financial performance pre- and post-downsizing according to social accounts provided.
Subsequently, we briefly discuss the methodology providing detailed data analysis and
discussion. Lastly, concluding remarks provide an awareness of noteworthy contributions,
limitations and future research associated with this study.

1. Literature review
Downsizing has become one of the most popular radical management strategies to cut
costs and restructure within the organization (Tsai and Yen, 2008; Datta et al., 2010).
Accordingly, financial performance measures have been evaluated as both antecedents
and outcomes of downsizing events.

1.1 Financial performance as an antecedent of downsizing

The resource-based view (RBV) of the firm suggests that downsizing is an appropriate
reaction to organizational performance declines, such that the firms can increase
organizational efficiency by reducing variable/labour costs, while increasing both human
resource efficiency and fixed/capital utilization (Greenhalgh et al., 1988; McCune et al.,
1988; Datta et al., 2010). Based on a comprehensive sample of over 5,300 organizational
layoff announcements recorded in the Wall Street Journal from 1970 to 2007, Hallock (2009)
provides evidence that slump in demand and cost control consistently rank among as the
first and second (respectively) triggers for organizational downsizing.
While the majority of research studies on firm performance as an antecedent to
downsizing indicate that performance declines result in layoffs (e.g. Hillier et al., 2007;
Tsai and Yen, 2008), a limited number of studies report that firm performance does not
significantly predict downsizing (e.g. Hyun-Oh and Mody, 2000; Perry and Shivdasani,
2005). Alternatively, some researchers argue that downsizing can be used in the
absence of organizational decline, to increase competitive advantages, develop new
MD technologies, eliminate slack or realize operational synergies (O’Shaughnessy and
52,8 Flanagan, 1998; Hirschman, 2001; Tsai and Yen, 2008). Firms may also downsize due
to institutional triggers or management ideologies unrelated to environmental or
organizational decline (McKinley et al., 2000; Carmeli and Sheaffer, 2009).
Theoretically and pragmatically, the decision to downsize is largely, but not
exclusively a result of organizational decline. These inconsistent results suggest a more
1476 complicated relationship regarding the impact of firm performance on downsizing events,
indicating a need to establish and evaluate more complex models between the two.

1.2 Financial performance as an outcome of downsizing

Research regarding financial performance as an outcome of downsizing is largely
aimed at addressing the basic question of “Does employee downsizing result in
improved organizational performance?” (Datta et al., 2010, p. 322). Economic theory
implies that management actions and organizational outcomes are tightly coupled, and
that firms rationally calculate and seek efficiency (Carmeli and Sheaffer, 2009).
Accordingly, a fundamental assumption in this stream of research is that organizations
initiate in downsizing activity to reduce costs, gain efficiencies, increase company
profits and positively impact the firm’s competitive position (Cameron et al., 1993;
McKinley et al., 2000).
Research evaluating financial accounting outcomes of downsizing produces
mixed results. Advocates of downsizing contend that it leads to lower overhead, less
bureaucracy and faster decision making, which results in positive organizational
outcomes (Bruton et al., 1996). A number of studies provide evidence supporting
the notion that employee downsizing leads to increased organizational financial
accounting performance (Bruton et al., 1996; Kang and Shivdasani, 1997; Palmon
et al., 1997; Espahbodi et al., 2000; Chen et al., 2001). Extending on this work, Perry and
Shivdasani (2005) provide evidence that firms experience long-term improvements
from employee reductions (two to three years post-downsizing).
In contrast, critics of downsizing indicate that it is short-sighted and arbitrary,
suggesting that downsizing activities largely produce negative outcomes (McKinley
et al., 2000). A number of recent studies provide evidence that employee downsizing
has a negative effect on long-term organizational financial performance (Cascio and
Young, 2003; Guthrie and Datta, 2008; Scott et al., 2011). Given the disparate results,
there is a need for more empirical evidence to expand our knowledge of the effects
of downsizing on organizational performance.
An emerging body of research focuses on explaining the mixed research findings
regarding organizational financial performance post-downsizing by evaluating
possible moderating effects. As a result, evidence indicates that: first, the scope
(broad vs deep cuts) and nature of the downsizing (proactive vs reactive) moderates the
impact of downsizing activities on performance measures (Love and Nohria, 2005);
second, loss-making organizations experience lower performance improvements post-
downsizing than non-loss making organizations (Yu and Park, 2006); and third, post-
downsizing industries with high research and development, growth, and low capital
intensity experience more decline in organizational performance compared to their
counterparts (Guthrie and Datta, 2008).
This research expands the current understanding of the relationship between
downsizing and organizational financial measures by exploring the relationship
between the rationale provided for the initial downsizing decision and organizational
financial measures both pre- and post-event. Through this evaluation, we provide a
comprehensive awareness of the downsizing phenomena as part of an intentional Financial
organizational activity in the context of the broader organizational existence. performance and
1.3 Downsizing rationale and hypotheses downsizing
A downsizing endeavour is commonly launched or initiated through an official
announcement (Appelbaum et al., 1999). In the majority of downsizing events, the same
announcement is used for both internal and external audiences (Gandolfi, 2007). 1477
While most organizations do not have a systematic approach for announcing layoffs,
they offer an explanation of why the layoff occurred in the first place.
There are four types of explanations (referred to as social accounts in psychology
literature): excuses, justifications, apologies and denials (or refusals), as summarized in
Table I. These vary along two dimensions: the admission of the negative nature of the
event and the acceptance of responsibility for the event (Schlenker, 1980).
1.3.1 Excuse. An excuse occurs when a decision maker admits their actions are
inappropriate or unfavourable, however, denies full responsibility for the action by
citing mitigating circumstances (Scott and Lyman, 1968). The downsizing is framed as
a negative event, but long-term goals and mitigating circumstances are used in the
announcement to shift blame for the decision. Such reframing does not minimize
agent responsibility, instead places actions in a larger framework to legitimize it.
A key defining factor in categorizing an excuse is that excuses are personal and limited
to a set of unique circumstances that focus on the actor (organization), not the
act (downsizing event). Announcements based on excuses refer to the option of
downsizing in the context of other factors (e.g. poor economic conditions, decline in
global trade, etc.), therefore it is reasonable to expect organizational decline pre-
downsizing when excuses are used to rationalize the downsizing decision (H1).
However, the mitigating circumstances that lead to the decision to downsizing are
macro issues that are not within direct and immediate management or organizational
control. These larger, often macro issues cannot be solved with headcount reductions
alone and require broader economic, social, political, technological or legislative
changes in order to be mitigated or managed appropriately. Thus, we expect that
organizations engaging in excuse-based downsizing will continue to experience
organizational decline; however, based on economic theory, downsizing should result in
a decrease in the rate of decline post-downsizing (H2).
1.3.2 Justification. A justification indicates that the decision maker accepts
responsibility for the act but minimizes the negativity of it by pointing to fulfillment of
some super-ordinate goal(s) (Scott and Lyman, 1968). Negative references focus
attention on how the organization would be in a worse position for not taking action,
while positive references focus attention on the future, suggesting that uncertainty or

Acknowledgement of organizational responsibility

Low High

Acknowledgement of negativity of downsizing decision

Low Denial/refusal Justification Table I.
“This is not a downsizing event” “It could have been worse” A Framework for
High Excuse Apology evaluating downsizing
“I had to do this, but it is not my fault” “I’m sorry that I caused you harm” announcements: denial,
justification, excuse
Source: Modified from Schlenker (1980) and apology
MD adversity now will help future security or that current changes will minimize future
52,8 losses (Bateman and Crant, 1993). Inherent in justifications is a balance of interest and
the explicit or implicit suggestion that others in the same situation would engage in
similar actions. Given that a justification focuses on future performance improvements
rather than past results; we predict that organizations with stable organizational financial
performance pre-downsizing will engage in justification-based downsizing (H3).
1478 Downsizing announcements providing justifications can refer to the option
of downsizing as the lesser of two evils (e.g. to prevent future plant closures or
bankruptcy or larger layoffs in the future). The organization, while responsible for
the event, is still fulfilling its informal obligations to its stakeholders. Accordingly, we
posit that organizations that rationalize downsizing using justifications will increase
financial performance post-downsizing (H4).
1.3.3 Apology. An apology indicates acceptance of responsibility for the situation
and the undesirability of the situation. This often implies that alternatives were
available. Under these conditions, partial or full guilt is admitted, along with
statements of regret or apology (Schonbach, 1990). Given that a key condition for an
apology is recognition of the undesirability of the situation, we posit that organizations
engaging in downsizing activity rationalized using apologies experience financial
decline pre-downsizing (H5).
This explanation includes both a responsibility for the event and an awareness that the
event is negative, which combined can heighten the perceptions that the downsizing is a
result of flawed management or an erroneous strategy. Downsizing in this situation may
be a “knee jerk” reaction to organizational problems, without a diagnostic evaluation on
the necessity for organizational change (Appelbaum et al., 1999; McKinley et al., 2000). The
solution of reducing employee headcount may not address the larger and perhaps more
complex reason(s) why the organization experiences inefficiencies (i.e. product deficiencies,
inflated costs of equipment, etc.), therefore we expect to see no improvements in the rate of
organizational financial decline post-downsizing.
In addition, the choice to downsize using an apology indicates a management failure
to fulfill their obligations towards their employees, directly violating the implicit
employment contract (Rousseau and Parks, 1993; Rousseau, 1996), which can have a
potent impact on organizational outcomes, including productivity (Charness and
Levine, 2000). The absence of a legitimate explanation for a decision can decrease
levels of cooperation (Del Val and Fuentes, 2003) and increase levels of withdrawal and
retaliation among employees (Brockner and Wiesenfeld, 1993; Wanberg et al., 1999).
Given the expected negative employee reactions, we posit that organizations
rationalizing downsizing events using apologies will experience an increased rate of
decline post-downsizing (H6).
1.3.4 Denial. A denial or refusal is the rejection that the situation is undesirable or
that the agent is responsible for its occurrence, completely asserting innocence in
regards to the event (Schonbach, 1990). In a downsizing situation, organizations can
shift responsibility for the downsizing by blaming employees or denying that
downsizing is a negative event altogether (e.g. reframing the event as a positive event,
such as calling it a rightsizing or optimization). In this situation, institutional theory
may be applied to indicate that these organizations view downsizing as a legitimate,
non-negative, prevalent managerial practice (McKinley et al., 2000) often to mimic
the use of downsizing among firms considered to be “successful” or “legitimate”
(Ahmakjian and Robinson, 2001; Datta et al., 2010). Thus, we posit that organizations
experiencing growth pre-downsizing will engage in denial-based downsizing (H7).
 There are two convergent positions that lead to the following hypothesis. One, Financial
organizations that engage in denials also engage in positive reframing. This reframing performance and
is often triggered by an automatic decision process that prevents effective diagnosis
of strategic issues and hinders management’s perceptions of reality (Carmeli and downsizing
Sheaffer, 2009). Two, downsizing is a negative event for employees. By shifting blame
to employees, explanations involving denials may be reflective of information hiding,
poor relationships between employees and employers, or a lack of accountability for 1479
organizational activities by its agents. Combined, these perspectives indicate that
organizations that rationalize downsizing decisions using denials should experience
financial decline post-downsizing (H8).

2. Methodology
Downsizing announcements from Canadian newspapers (local, regional, national) published
from 1 January 2005 to 31 December 2011 were collected from Factiva (an international
database of 25,000 news and business publications) by searching for commonly used words
for downsizing (e.g. layoffs, restructuring, job cuts, delayering, reduction-in-force, workforce
reduction, etc.). In cases of multiple announcements, the earliest announcement (based on
date) was used. As a result, 264 downsizing announcements were collected.
Announcements that lacked detailed information or those regarding organizations
that were privately owned were eliminated from the study. Archival financial data was
extracted from the DataStream database (Thomson Reuters). The final sample size totalled
178. We collected information for a period of three years prior to the downsizing event
(coded as year 3, 2 or 1) and three years post-downsizing event (coded as year 1, 2
or 3) in order to evaluate both pre- and post-downsizing organizational financial
performance. We centred the results around the year of the downsizing event (year 0).

2.1 Rationale for downsizing

Three raters read each announcement and coded the explanation provided for the layoff
according to the definitions of justifications, excuses, apologies and denials provided
above. Aligned with best practices in policy capturing or conjoint analysis techniques,
raters were initially provided nine announcements to develop judgement analysis on,
which were excluded from this analysis (Aiman-Smith et al., 2002). As an accepted process
to acclimate raters, evaluating these nine announcements provided an opportunity to
ensure that raters understood the nature of the judgement task and developed appropriate
decision rules prior to rating the announcements in the study sample. Interrater reliability
on coding of the remaining announcements was 97 per cent.
There were five announcements considered to reflect more than one rationale after
the first round of coding. The content of these announcements were discussed with all
three raters until subsequent consensus was achieved. In these situations, there was
consistently a clear dominate explanation provided, and coding aligned with the
dominant explanation. For example, an announcement discussing how an organization
engaged in downsizing to avoid future losses and stabilize the company before the
situation got too “severe”, with a single statement suggesting that the organization felt
“badly” about the employee experience was classified as a justification, rather than an
apology given that the justification dominated the announcement focus.

2.2 Organizational financial performance metrics

For the purpose of our research, six accounting and human resource metrics are
assessed; profitability, return on assets (ROA), return on equity (ROE), asset turnover,
MD productivity and operating income per employee (OIPE). Our choices are grounded in
52,8 the RBV with the firm as well as economic theory, as previously discussed.
Asset turnover, profit margin, ROA and ROE are widely used as financial measures in
accounting and downsizing literature (Datta et al., 2012). Asset turnover is determined by
calculating sales divided by the average total assets (current and past year) of an
organization. This is a commonly used measure for evaluating organizational financial
1480 performance associated with downsizing activity, given that it provides a measure of how
efficiently assets are used to generating sales (Kieso et al., 2010).
The remaining three accounting measures (profit margin, ROA and ROE) share net
income as the numerator, which is a calculation of sales minus the cost of goods sold
and operating expenses (including costs associated with the layoff, such as severance
and payments in lieu of reasonable notice). Profit margin is determined by calculating
net income over total sales, providing a metric to evaluate what per cent of net income
is generated by total sales. ROA is calculated by determining net income over the
amount of average assets (averaged over the two-year period), providing a ratio used to
determine overall profitability of the firm’s assets. ROE is calculated by determining
net income over total equity, providing an assessment as to how profitable owners’
initial investments are.
Aligned with our interdisciplinary approach, we also integrate two human resource
metrics in our evaluation, providing a means to evaluate financial performance as an
individual measure (per employee). We examine productivity, determined as total sales
divided by the total number of employees, and OIPE, determined as net income over
the total number of employees. Productivity measures assume an external view as to
the decision, rationale and impact of downsizing by focusing on annual sales. However,
it does not include any adjustments for cost changes.
In contrast, OIPE incorporates changes in operating costs, which includes
labour costs. Thus, OIPE provides a different evaluation of organizational financial
performance than productivity, given that traditional measures of productivity can
rise, even though cost may not be contained. Alternatively, sales can remain stable
or even decline while OIPE may increase, demonstrating a more efficient use of the
existing resources. As a result, OIPE provides an internally focused evaluation of
the downsizing phenomena. While productivity has been included in a number
of studies in this research realm to date, OIPE presents a relatively new organizational
outcome worth evaluation. To date, only one study has examined the impact of OIPE
in the context of downsizing (Yu and Park, 2006).

3. Results
In Table II, we report the reasons for downsizing as determined through content
analysis of the full announcement text. An excuse is the most common rationale given
for downsizing, followed by a justification. There is a relatively even distribution of
organizations with head office in Canada vs internationally owned/managed
organizations. Industry distribution using the two digit North American Industry
Classification System identifies that the manufacturing sector accounted for the most
downsizing events (47.75 per cent), although this industry accounted for slightly over
11 per cent of employment in Canada in 2008 (Statistics Canada, 2013). Real estate and
utilities industries experienced one downsizing event over the period evaluated, which
may be attributable to the high rate of self-employment in the real estate industry, and
the limited number of organizations in the utilities industry in Canada. The median
(mean) size of layoffs announced is 300.00 (923.00), with a range of 11-32,000 affected
 2006 2007 2008 2009 2010 2011 Total
Financial
performance and
Social account downsizing
Justification 10 5 21 10 5 10 61
Excuse 5 7 19 17 10 19 77
Apology 3 1 4 0 1 4 13
Denial 2 2 7 8 3 5 27 1481
Industry (NAICS 2 digit code)
Agriculture 1 2 2 0 2 0 7
Finance 0 0 4 1 2 10 17
Information 6 0 7 6 3 12 34
Manufacturing 11 11 28 20 5 10 85
Metals and mining 0 1 3 4 4 0 12
Real estate 0 0 1 0 0 0 1
Retail 1 1 0 0 0 3 5
Transportation 1 0 5 4 3 3 16
Utilities 0 0 1 0 0 0 1
Canadian Head Office
No 10 8 21 10 11 28 88 Table II.
Yes 10 7 30 25 8 10 90 Descriptive statistics of
Total 20 15 51 35 19 38 178 sample organizations

employees per downsizing announcement. Regarding layoff severity, the vast majority
of downsizing announcements impacted o25 per cent of the workforce (96.6 per cent).

3.1 Reported measures summary

Table III provides a summary of average organizational financials reported for
organizations that engaged in downsizing, by year and social account. In the fiscal year
of the layoff announcement, the average firm reported sales of $35.45 M, operating
profit of $2.58 M, earnings before interest and tax (EBIT) of $2.67 M, and employed
65,157 employees.
On average, organizations experienced relatively stable sales figures until the year
the downsizing was announced. Organizations rationalizing downsizing with excuses
and justifications experience a decline in sales two years after the downsizing event,
while organizations that rationalize downsizing using denials and apologies report an
increase in sales two years after the downsizing event.
Pre-downsizing, trends for operating profit and EBIT are similar. From year 2 to
year 0, organizations experience a decline in operating profits and EBIT, regardless of
downsizing rationale. The one violation of this trend is organizations engaging
in denials, which experience an increase in operating profit from year 2 to year 0
(108 per cent) and year 0 to year 2 (73 per cent).
Post-downsizing, organizations engaging in justification- or excuse-based downsizing
experience decline in both financials, while organizations engaging in denial-based
downsizing experience growth in both financials. Organizations engaging in apology-
based downsizing experience near zero EBIT two years after the downsizing (compared to
an average of $0.94 M in year 0). This may be indicative of changing or accelerated
depreciation or amortization of assets (property, plant and equipment).
Summary statistics for total assets indicate that organizations generally maintain
assets in the two years leading up to the downsizing, but liquidate or restructure assets
post-downsizing. This suggests that downsizing may be part of a larger organizational
 MD
52,8

1482

Table III.
Mean organizational
performance measures by
social account, years 2-2
Justification Excuses Apologies Denials All
Mean SD Mean SD Mean SD Mean SD Mean SD

Sales ($M)
Year 2 39.94 165.54 33.81 53.32 58.21 76.64 33.11 51.41 37.59 107.10
Year 1 44.20 185.48 31.75 44.49 55.94 73.42 35.30 55.89 38.32 116.18
Year 0 36.50 129.84 32.13 46.91 55.58 71.21 33.01 54.62 35.45 86.73
Year 1 40.80 161.11 31.04 54.96 80.44 82.64 30.43 49.97 37.26 107.60
Year 2 20.19 30.74 23.95 34.47 71.37 72.62 43.55 63.55 28.04 42.67
Operating profit ($M)
Year 2 3.97 17.66 3.52 7.74 2.94 4.02 0.77 4.60 3.23 11.76
Year 1 4.60 17.53 3.72 6.50 1.32 3.80 2.42 4.09 3.66 11.30
Year 0 2.42 5.01 3.33 6.41 0.87 5.58 1.61 4.15 2.58 5.61
Year 1 3.84 15.97 3.28 7.02 3.90 4.74 1.16 2.68 3.19 10.80
Year 2 1.62 2.71 2.78 4.94 1.93 2.01 2.78 4.79 2.25 3.97
EBIT ($M)
Year 2 5.05 26.29 4.07 8.13 2.60 5.11 1.61 4.94 3.93 16.52
Year 1 3.82 13.48 4.40 7.47 2.14 4.76 2.72 4.49 3.79 9.55
Year 0 2.22 5.20 3.88 7.17 0.94 5.08 1.09 4.64 2.67 6.11
Year 1 4.37 21.00 3.44 7.48 2.74 5.62 1.70 3.62 3.47 13.77
Year 2 1.47 2.74 2.78 5.37 0.01 5.39 2.48 5.08 2.03 4.42
Total assets ($M)
Year 2 50.18 164.66 190.16 438.14 88.10 126.06 80.95 204.63 117.81 320.47
Year 1 51.06 161.03 197.92 456.64 82.72 117.51 83.17 199.26 121.83 331.61
Year 0 50.12 147.45 206.67 469.23 82.59 118.22 80.61 193.56 124.91 337.53
Year 1 53.65 188.04 89.80 221.15 118.98 127.35 46.28 76.59 71.17 187.94
Year 2 22.57 37.52 91.63 266.45 106.97 110.96 62.90 92.81 59.90 173.95
Number of employees
Year 2 52,270 73,799 75,289 105,403 135,199 142,563 72,037 93,049 70,541 97,610
Year 1 52,190 72,447 70,204 101,477 122,041 130,652 63,137 82,762 66,637 92,946
Year 0 50,802 68,897 69,983 100,902 114,479 119,691 62,153 80,035 65,157 89,948
Year 1 49,871 68,234 59,293 89,206 113,099 114,369 62,017 85,195 59,396 83,307
Year 2 52,512 82,090 56,645 90,529 110,127 107,534 70,848 96,164 60,269 88,673
strategy to use resources (physical and human) more efficiently. Regardless of social Financial
account, from year 2 to year 0, organizations generally reported a decrease in the size performance and
of the workforce. On average, organizations engaging in justification and denial-based
downsizing report total employee numbers two years after the layoff that recover to downsizing
levels reported two years prior to the layoff.

3.2 Organizational financial performance pre- and post-downsizing 1483

Analysis of paired sample t-tests for equality of means for each organizational
financial performance measure provides evidence that performance measures pre- and
post-downsizing vary somewhat based on social account. Mean differences that are
statistically significant at the po0.05 level are noted in Figures 1-6 on the time axis

1,200

1,000

800 justification
excuse
600
apology
400 denial
Total
Figure 1.
200
Productivity pre- and
post-downsizing by
0 social account
Year –2 Year –1 Year 0 Year 1 (d ) Year 2

150,000

100,000

50,000
justification
0,000 excuse
apology
–50,000
denial
–100,000 Total
–150,000
Figure 2.
–200,000 OIPE pre- and
)

)
)
(b

post-downsizing by
,d

(d

,d

,d
2

(b

(b

(b
r0
r–

social account
1

r1

r2
a
a

r–

Ye
Ye

a
a

Ye

Ye
Ye

0.060
0.040
0.020
0.000 justification
Year –2 (c) Year –1 (f ) Year 0 Year 1 Year 2 excuse
–0.020
apology
–0.040
denial
–0.060
Figure 3.
Total
Profit margin pre- and
–0.080
post-downsizing by
–0.100 social account
–0.120
MD such that “a” represents justification and excuse, “b” represents justification and
52,8 apology, “c” represents justification and denial, “d” represents excuse and apology, “e”
represents excuse and denial, and “f ” represents apology and denial comparisons.
Organizations engaging in downsizing experience an increase in productivity prior
to the downsizing event, with organizations that engage in denial-based downsizing
securing the highest levels of productivity, while those engaging in apology-based
1484 downsizing securing the lowest levels of productivity (see Figure 1). When examining
performance the year before and the year after the downsizing, all organizations
indicate increasing productivity over time with the exception of justifications. On the
topic of OIPE, similar patterns are shown for all explanations indicating an increase in
OIPE leading into the downsizing, with a negative measure in year 1 after the
downsizing and a recovery the following year. The exception is apologies, which have
the least volatility in terms of OIPE. The results provided in Figure 2 indicate a
significant mean difference between justification and apology, as well as excuse and
apology over time.

0.050
0.040
0.030
0.020 justification
0.010 excuse
0.000 apology
Figure 4. –0.010
Year –2 (b) Year –1 Year 0 Year 1 Year 2 (b, c ) denial
ROA pre- and –0.020 Total
post-downsizing by –0.030
social account –0.040
–0.050

0.400
0.200
0.000
Year –2 Year –1 Year 0 Year 1 Year 2 (e) justification
–0.200
excuse
–0.400
apology
–0.600
Figure 5. denial
–0.800
ROE pre- and Total
post-downsizing –1.000

by social account –1.200

–1.400

1.200

1.000

0.800 justification
0.600 excuse
apology
0.400 denial
Figure 6.
0.200 total
Asset turnover
pre- and post-downsizing 0.000
by social account Year –2 Year –1 (a) Year 0 Year 1 Year 2
–0.200
At the aggregate level, profit margin, ROA, and ROE evaluations provide Financial
evidence that excuses are outliers in year 2. Prior to the downsizing, on average, performance and
organizations experience a decline in profit margins (with the exception of denials),
as indicated in Figure 3. These results indicate that the year after the layoff is announced, downsizing
justification-based downsizing experience profit margin increases. Organizations
engaging in excuse-based downsizing have the most volatile profit margins.
In general, organizations experience a slight increase in profit margin two years 1485
post-downsizing, regardless of downsizing rationale. This suggests that overall,
downsizing has a positive impact on profit margin, one and two years post-downsizing,
but the magnitude of change varies based on downsizing rationale.
Figure 4 indicates a ROA decline in the year leading into the downsizing, with
apologies experiencing lowest level of ROA prior to the downsizing. Trends regarding
ROA are similar to trends of the profit margin analysis. As highlighted in Figure 5,
organizations experience the largest drop in ROE when denial-based downsizing is
used. On average, organizations engaging in excuse or apology-based downsizing
experience a slight decline in ROE the year after the downsizing is announced, with
a return to previous measures two years after the downsizing event. Overall, there
is growth in asset turnover in year 2 and 1 in all cases (Figure 6). There is not a lot
of volatility in the patterns that are established, with the exception that apologies and
denials secure higher levels of asset turnover, while excuses and justifications secure
lower levels.
Lastly, Table IV provides statistical analysis of mean differences in the various
organizational financial performance metrics by social account, longitudinally, using
paired sample t-tests within subjects. We also include the aggregate level analysis in
the final columns.

4. Discussion and contribution

Datta et al. (2012) suggest that the mixed findings on the relationship between
downsizing and organizational financial performance indicate that the appropriateness
of downsizing may be contextually dependent. They indicate that research regarding
contextual factors is rather limited; suggesting that models to improve our
understanding of performance implications of downsizing would provide interesting
insights. Accordingly, we posited that the downsizing decision rationale indicates a
larger contextual consideration in this relationship.
When limited to the four accounting measures calculated, organizations engaging in
excuse-based downsizing experience the most significant levels of volatility and
decline prior to the downsizing event, supporting H1. When examining the human
resource metrics, an increase in both OIPE and productivity usually precedes
downsizing announcements. On average, organizations experience growth two years
after excuse-based downsizing. Thus, support for H2 was secured.
Contrary to what we expected, asset turnover, OIPE and productivity from year
2 to year 1 appear to trigger justification-based downsizing, refuting H3.
Post-downsizing, these organizations experience an increase in year 1 of OIPE followed
by a decrease in the following year. There is also a very small increase in asset turnover
the year following the downsizing. Therefore, organizations rationalizing the decision
to downsize based on justification often experience financial decline prior to the
downsizing experience, but do not report statistically significant increases to
organizational financial performance measures post-downsizing, supporting H4.
This suggests that the downsizing stabilizes a company experiencing decline such that
 MD
52,8

1486

Table IV.

social account
means over time by
Paired differences in
Justification Excuse Apology Denial All
Paired diff. SD Paired diff. SD Paired diff. SD Paired diff. SD Paired diff. SD

Asset turnover
Year 2 to 1 1.05** 0.62 0.87** 0.48 0.93** 0.48 0.86** 0.36 0.95** 0.53
Year 1 to 0 0.06* 0.15 0.01 0.16 0.02 0.10 0.06 0.16 804.06 7,914.59
Year 0 to 1 0.07* 0.20 0.06* 0.17 0.03 0.15 0.02 0.09 73.23** 142.51
Year 1 to 2 0.02 0.23 0.04 0.21 0.09 0.17 0.00 0.14 840.79 8,277.71
Profit margin
Year 2 to 1 1.10 3.93 2,227.07 13,175.99 0.64 3.84 0.52 2.40 896.15 8,817.83
Year 1 to 0 0.04* 0.11 0.12 0.58 0.07 0.37 0.06* 0.08 710.93** 831.11
Year 0 to 1 0.01 0.19 0.01 0.29 0.11 0.37 0.03 0.08 0.03 0.15
Year 1 to 2 0.02 0.19 0.14 0.49 0.05 0.20 0.03 0.11 0.06 0.37
ROA
Year 2 to 1 1.11 3.93 2,329.12 13,780.50 1.01 3.14 0.07 1.61 12.61 103.93
Year 1 to 0 0.04 0.14 0.04 0.13 0.02 0.11 0.05* 0.07 0.04** 0.12
Year 0 to 1 0.01 0.14 0.00 0.16 0.02 0.17 0.01 0.06 0.23 1.47
Year 1 to 2 0.02 0.14 0.05 0.22 0.03 0.16 0.01 0.06 97.12* 442.09
ROE
Year 2 to 1 2.58 12.16 2,480.29 14,679.88 1.58 7.31 0.02 2.47 0.06** 0.17
Year 1 to 0 0.30 1.38 0.16 1.42 0.60 2.73 0.00 0.89 0.00 0.24
Year 0 to 1 0.56 2.91 0.65* 1.56 1.30 2.29 0.00 0.71 118.70** 324.19
Year 1 to 2 0.01 4.32 0.49* 1.36 0.54 1.35 1.27 3.09 0.00 0.14
OIPE
Year 2 to 1 69.89** 87.87 60.90** 117.60 24.15 40.58 141.67 287.71 0.58* 2.20
Year 1 to 0 3.21 94.46 18.21 99.90 3.47 66.69 49.04 148.85 5.31 238.63
Year 0 to 1 135.94** 254.55 76.61** 148.77 4.66 43.50 239.83 702.39 0.03 0.20
Year 1 to 2 151.05** 284.70 92.86* 220.92 24.78 140.44 247.23 624.51 0.06 0.33
Productivity
Year 2 to 1 722.91** 809.29 645.67 804.36 530.61** 131.13 942.89** 1,159.66 129.43** 330.38
Year 1 to 0 124.72 402.35 70.71 440.83 43.38 122.55 164.55 648.09 0.03 0.16
Year 0 to 1 12.68 252.49 13.10 207.93 61.89 247.12 68.70 274.07 0.04 3.17
Year 1 to 2 17.58 332.52 0.84 253.78 7.85 75.48 12.11 235.97 9.95 275.21
Notes: *,**Statistically significant mean difference at po0.05 and po0.01 level, respectively
there is no additional decline post-downsizing. Thus, downsizing appears to be Financial
successful in preventing future damage to organizational performance. performance and
Apologies experienced the largest decline in operating profit and EBIT of all
explanations pre-downsizing, supporting H5. This may indicate that losses or downsizing
organizational financial performance decline prior to the downsizing may be too severe
for an organization to rationalize using justifications or excuses. It is plausible that
beyond a certain point of decline, organizations need to assume blame for downsizing, 1487
to align with perceptions that organizational agents should have been able to foresee
the factors that contributed to the decline (Chhinzer, 2014). Apologies also result in the
lowest levels of performance on HR metrics, as well as profit margin and ROA post-
downsizing, thus H6 was supported.
Summary statistics preserve the suggestion that denial-based downsizing occurs in
organizations experiencing positive organizational financial performance, supporting H7.
Noteworthy is the fact that organizations engaging in denial-based downsizing decrease
the size of the workforce (on average) the year prior to the downsizing announcement. This
suggests that the downsizing activity may have been part of a large organizational
strategy aimed at restructuring the organization, rather than simply focused on cost
containment. Post-downsizing, organizations that engage in denial return to pre-
downsizing organizational financial performance measures (supporting H8), indicating
that perhaps the goal of denial-based downsizing is less focused on reduction of headcount
or containment and rather a redirection or refocusing of the organization.
There are three noteworthy contributions of this study. First, we provided evidence
that downsizing is not a homogenous event, rather it can be disaggregated based on a
variety of factors, including acknowledgment of the negativity of the event and
acknowledgment of responsibility for the event. The results indicated contextual
factors, such as downsizing rationale, can be used to create meaningful categories and
add depth to our understanding of the downsizing phenomena, based on financial
analysis, human resource perspectives and psychology-based rationalizations.
Second, recent reviews of downsizing research have criticized studies focused
exclusively on the pre-downsizing trends or post-downsizing trend, rather than
viewing downsizing as an event within the organization’s life (Datta et al., 2010).
Through inclusion of both pre- and post-downsizing organizational financial
performance metrics, we presented a more holistic perspective regarding the
downsizing event antecedents and consequences in a unified way.
Third, our research highlights how the selection of metrics to determine success or
failure of the downsizing should be considered carefully. There have been a variety of
measures used to define organizational financial performance, which are not
synchronistic with each other. For example, if a predominant goal of downsizing is to
increase profit margin, then profit margin analysis pre- and post-event should be the
measure the organization uses to determine if the HR practice of downsizing has met
the desired objective. A fundamental premise of strategic HRM is that human resource
practices should align with the strategic goals and initiatives of the organization. Thus,
a contribution of this research is that we provide evidence that the selection of metrics
is a critical factor in determining the relationship between downsizing practices and
organizational financial performance.

5. Limitations and future research

Aligned with the accepted methodology in the field of research, we relied on
downsizing announcements to provide evidence regarding which company engaged in
MD downsizing activity and at what point in time. Similar to other studies that used this
52,8 methodology, we recognize that the list generated is not inclusive. Not all downsizing
announcements result in media announcement, and there may be concern regarding
the accuracy of downsizing announcements coupled with the explanations provided.
Future research should consider alternative methods to find a more complete list of
organizations that engage in downsizing.
1488 We collected information regarding downsizing events from 2005 to 2011 in Canada.
However, 2008 was marked by economic decline in many nations of the world.
Although the Canadian recession was not as drastic or prolonged as the American
recession; collection of information over multiple business cycles or economic cycles
may help neutralize the effect of the recession. Alternatively, collection of economic
indicators and alignment of these indicators with the measures that were collected can
further explain the relationship between external economy and organizational
activities such as downsizing. Future research can consider the impact of external
economy in the context of explanations provided for organizational event such as
downsizing and the impact on performance measures at the organization level.
Additionally, categorizing organizations based on industry, organizations size,
number of employees, competitive position or leadership characteristic may provide
additional information depth to our understanding of the relationship between
downsizing and organizational financial performance.

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About the authors

Dr Nita N. Chhinzer (MBA, PhD) is an Associate Professor of Human Resources in the
Department of Management at the University of Guelph. She is also the recipient of a Fellowship
in Leadership, HRM and Work at the University of Guelph (2012-2017). Her research is
concentrated on strategic human resources management, with a strong focus on downsizing
practices, procedures and ethics. Dr Nita N. Chhinzer is the corresponding author and can be
contacted at: chhinzer@uoguelph.ca
Elliott Currie (MBA, CPA-CMA) is an Associate Professor in the Department of Management
at the University of Guelph. Currie secured decades of experience in accounting and credit
management in multiple industries (oil and gas, aviation, primary metals). The primary focus
of Currie’s scholarly endeavours is in the areas of strategy, policy development and
organizational financial management. Also, he was recently appointed Executive Director of the
Ontario Hazelnut Association.

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