Downsizing strategy, stakeholder-agency theory, and the value of the firm

The purpose of this dissertation is to assess the impact of corporate downsizing strategy, specifically the termination of employees from the payroll, on long-term financial performance. Downsizing has become quite popular in recent years as a means of improving efficiency and enhancing global competitiveness. However, corporations differ significantly in their nature and structure and also in the motivation, methods, timing, and conditions under which they implement downsizing. Hence, the results of a strategy of massive layoffs should not be expected to be uniformly financially beneficial across all firms and, in fact, for some, such actions may indeed be detrimental.; This complex issue is evaluated within the conceptual framework of the Stakeholder-Agency Theory of the firm. A downsizing strategy, directly or indirectly, impacts all stakeholders, including management, employees, communities, suppliers, customers, and shareholders. At issue is whether the labor cost savings and potential productivity gains from employee reductions may, under certain conditions, be more than offset by rising agency costs and other costs attributable to the downsizing action. Limited evidence exists concerning downsizing's value for firms as a means to counter declining performance or to enhance efficiency.; Results of this research indicate that downsizing negatively impacts the long-term financial performance of the firm. In addition, the presence of excess cash prior to the reduction in the workforce and the use of multiple downsizings result in lower financial performance over both the two-year and five-year sample periods after the downsizing. In contrast, the permanence of the downsizing action is found to positively impact long-term financial performance. The size and type of effect these factors exhibit is influenced by both the industry and the length of the sample period.