Date of Award

1996

Document Type

Thesis

Degree Name

Master of Human Resource Management

Department

Business

First Advisor

Betty LeMasters

Second Advisor

Laura DeRigne

Third Advisor

Erik J. Goldman

Abstract

This thesis focuses on the impact of downsizing on financial performance. Downsizing has become a catchall term for plant closures, eliminating entire layers of management, and even subcontracting large amounts of a firm's operations. Although many American firms are downsizing they often do hot consider what they are trying to achieve by cutting jobs or closing plants. Generally, U.S. companies are eliminating - jobs in their organizations in an attempt to cut costs believing that to do so will increase profitability and result in more efficient organizations. It is naturally assumed that any strategic change in a corporation, such as downsizing, is the realization of an attempt by management to enhance shareholder value.

This thesis hypothesizes that layoffs may have a short term positive effect on financial performance but do not result in a positive effect on the long term performance of a company. This hypothesis is tested by selecting and comparing two groups of companies; those that have announced layoffs and those that have not. A total of 49 companies were selected for the study, 16 of which had announced layoffs and 33 which had not. The comparison was made by analyzing eight financial performance measures for a period of seven years with particular focus on stock price, a short term measure, and Return-on-Equity (ROE), a longer term measure of financial performance. While stock price reflects investor's expectations, ROE reflects actual corporate performance.

Today many management incentive plans are tied to short term performance in the form of stock options. The results of this analysis indicate that it is possible to inflate the value of stock in the short term by announcing a plan for downsizing. The market perceives an immediate reduction in cost and a corresponding increase in profitability and projects this performance into the future. The actual performance of the group of companies announcing layoffs, as reflected in the ROE, does not improve with the announcement of layoffs and actually increases a downward trend at a period two years subsequent to the announced layoffs. Furthermore measures of productivity of human capital, specifically Profits per Employee and Sales per Employee, show a significant downward trend in the group of companies announcing layoffs as compared to the group not announcing layoffs.

The group of companies announcing layoffs demonstrated comparatively poor financial performance in the two years prior to the announcement of layoffs. This downward trend was not reversed with the announcement of layoffs. The only measure of financial performance considered in the study which did experience a positive move in the year of the announced layoffs was the Price/Earnings ratio indicating an increase in the price of the stock relative to its earnings. The evidence of the study supports the hypothesis that while short term financial performance may be effected positively by layoffs, longer term performance does not undergo a positive effect. This result implies that further consideration should be given to the overall value of layoffs. Although layoffs may be viewed as a sometimes effective component of reengineering the corporation when specific objectives are in mind, the evidence does not support the contention that layoffs can be seen as a direct means of improving corporate financial performance. An additional implication of this analysis suggests that executive compensation plans should incorporate long term incentive components.

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