Corporate Downsizing


The U.S. economy was at the height of economic expansion, stocks were near all time highs, corporate profits were strong, and the unemployment rate was at its lowest in two decades. At the same time, the major corporations in the United States were firing workers by the hundreds of thousands, and job insecurity had risen to an extremely high level. What was also ironic was the fact that the corporations who were initiating the downsizings were considered to be some of the strongest and most profitable in the country. Although these events seem to be inconsistent, this is what has happened throughout the decade of the 1990\'s.

Traditionally, downsizing was a direct result of a decline in the demand for a firm\'s product. This would mean that fewer items needed to be produced, therefore less employees were needed. Downsizing was also used as a way to cut costs during times of recession. But, the downsizings observed in the 1990\'s did not fit this mold. Instead of downsizing for survival, companies were using this as a strategic plan for creating an increase in stock prices.

The intent of downsizings by these top corporations who were already very profitable was to become "lean and mean". However, results of a survey published in the Wall Street Journal suggested that many of the firms did not meet their goals.

While corporate downsizing gets the publicity, the American economy has steadily grown richer. Many times the public confuses downsizing with recession, but in reality affects a single industry that is trying to accommodate itself to new realities of the market. While some industries have downsized, the economy has continued to grow.

History of Downsizing

Downsizing is defined as a reduction in the number of employees, and sometimes in the number of operating units within a company. It began as a strategy of weak corporations as a way to reduce the costs of the company. Shareholder wealth was the main concern, and companies were willing to do whatever they thought necessary to convince the market that the stock price should rise. The stock price had become more important in the decisions of top management because many companies were offering stock options to them as part of their salaries. Downsizing was being used as a survival strategy by corporations who were trying to increase their market values. It was often perceived as making a company more competitive in today\'s global marketplace.

In typical downsizing, a profitable firm would announce to the public that it was firing a large percentage of its workforce. The idea was that the market would get excited and begin buying up the firm\'s stock at a higher price. But, there are different views on how stockholders react to this kind of news.

The idea that downsizing increases stock prices is fueled by the belief that if earnings are to be maintained and improved, corporations have one alternative-cut costs. This usually meant cutting jobs because trimming the payroll seemed to be an easier way to increase profits in the short run. Downsizings also had everything that a company wanted when trying to increase stock prices-they were tragic and newsworthy and they showed that a company was serious about its cash flow.

Downsizing not only reduces the number of employees, but often shrinks the number of management levels as well, and middle managers have been particularly vulnerable to downsizing changes. Downsizing is usually done by a company because of the perceived effect of more efficiency, resulting in cost reductions.

This trend has emerged due to the idea that corporate downsizing will increase the stock price of a company. This paper will focus on this issue by looking at two major companies who have downsized in the last few years and the effects, if any, that it had on their stock prices.

Assumption of the Analysis

Before progressing further, it is important to qualify the companies in this data set as relevant for the purpose of carrying out this study. Specific qualifications are necessary to ensure that the information utilized from the companies selected is an accurate representation of downsizing. Therefore, a company should be included in the data set if it meets the following criteria:
The company is public and is listed on the NASDAQ or