Organizational Downsizing: Its Effect on Financial Performance Over Time

The current study investigated the financial effects of downsizing in Fortune 1000 Companies during a five-year period characterized by continuous economic growth. Return on assets, profit margin, earnings per share, revenue growth, and market capitalization were measured each year between 2003 and 2007. In general, the study found that both downsized and nondownsized companies reported positive financial outcomes during this period. The downsized companies, however, were outperformed consistently by the nondownsized ones during the initial two years following the downsizing. By the third year, these differences became statistically nonsignificant. Consequently, although many companies appear to conduct downsizing because the firm is in dire financial trouble, the results of this study clearly indicated that downsizing does not enhance companies' financial competitiveness in the near-term. The authors discuss the theoretical and practical implications of these findings.