In a study of 4,710 publicly traded firms from 2010, companies that downsized were twice as likely to declare bankruptcy as the ones that didn’t.
Our team of researchers from Auburn University, Baylor University, and the University of Tennessee, Chattanooga set out to better understand the consequences of downsizing in large, U.S.-based corporations. In our recently published work in the, we tested the theory that downsizing could lead to a host of problems that eventually increases the likelihood of bankruptcy.
To ensure the accuracy of our results, we controlled for known potential drivers of both downsizing and bankruptcy. These included the size of the firm, changes in market capitalization, prior performance, profitability, trajectory toward bankruptcy , a large number of employees per sales relative to their industry peers, and other indicators of financial health.
Given this finding, we sought to understand why some firms were able to survive the negative effects of downsizing while some were not. We speculated that examining firms’ remaining resources could shed light on this question. Accordingly, we examined intangible resources , financial resources, and physical resources.
We did find, however, that intangible resources helped to reduce the likelihood that downsizing firms would declare bankruptcy. Intangible resources can be redeployed in unique and perhaps innovative ways following downsizing. For example, existing employee knowledge can be utilized to revamp processes that have been interrupted or to replace these processes with more effective ones.
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