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Cure or curse: Does downsizing increase the likelihood of bankruptcy?

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  • Zorn, Michelle L.
  • Norman, Patricia M.
  • Butler, Frank C.
  • Bhussar, Manjot S.

Abstract

Downsizing is a common organizational practice, yet research on the outcomes of downsizing has produced mixed findings. To contribute to this debate, we use an organizational change perspective to investigate whether the large-scale changes inherent in downsizing set firms on a negative path that is difficult to overcome and ultimately increases the likelihood of bankruptcy. Additionally, we investigate what factors, if any, can mitigate this likelihood. To do so, we build on the resource-based view to suggest that valuable resources can reduce the likelihood that downsizing will lead to bankruptcy. We find support for our theorizing across a sample of publicly traded firms. Our findings suggest that downsizing firms are significantly more likely to declare bankruptcy than firms that do not engage in downsizing and that intangible resources help to mitigate this likelihood. We do not, however, find support for the role of physical and financial resources in preventing bankruptcy.

Suggested Citation

  • Zorn, Michelle L. & Norman, Patricia M. & Butler, Frank C. & Bhussar, Manjot S., 2017. "Cure or curse: Does downsizing increase the likelihood of bankruptcy?," Journal of Business Research, Elsevier, vol. 76(C), pages 24-33.
    • Handle: RePEc:eee:jbrese:v:76:y:2017:i:c:p:24-33
    DOI: 10.1016/j.jbusres.2017.03.006
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    8. Newman - Wadesango & Gwangwadza D.C. & Charity Mhaka & Ongayi Wadesango, 2018. "Labour Force Reduction’s Influence on Financial Performance of Manufacturing Companies: A Case Study of Playtime Manufacturers (2011 – 2016)," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 14(5), pages 48-72, OCTOBER.
    9. Lin, Eric S. & Lin, Chia-Ling & Lin, Hui-Lin & Hsiao, Yi-Chi, 2023. "Is downsizing a good strategy during the downturn? Evidence from Taiwanese manufacturing firms," Japan and the World Economy, Elsevier, vol. 65(C).
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    11. Yu Zhao & Huaming Du & Qing Li & Fuzhen Zhuang & Ji Liu & Gang Kou, 2022. "A Comprehensive Survey on Enterprise Financial Risk Analysis from Big Data Perspective," Papers 2211.14997, arXiv.org, revised May 2023.
    12. Michaela Staňková, 2023. "Threshold Moving Approach with Logit Models for Bankruptcy Prediction," Computational Economics, Springer;Society for Computational Economics, vol. 61(3), pages 1251-1272, March.
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