Do Press Announcements of Corporate Downsizing Predict Actual Downsizing?

Abstract

We investigate the determinants of actual downsizing following corporate press announcements of downsizing and find that some announcements are followed by lower growth rates in assets and employees and some are not. Our analysis indicates that the downsizing announcement sometimes implies net downsizing and sometimes implies strategic re-alignment of assets. Firms with increased asset and employee growth rates have higher market to book, a proxy for investment opportunities. In contrast, ex-post decreases in growth occur for firms with lower operating performance. Further we find that during a normal economy, board independence is also associated with lower ex-post growth, but not during a period of economic decline. This suggests relatively more board involvement in asset restructuring during normal or boom times. The results provide new evidence on the nature of information contained in announcements of asset downsizing and employee layoffs.

Keywords: restructuring, layoffs, downsizing, press announcements, board independence

JEL Classification: G34