Disclosure strategies and investor reactions to downsizing announcements: A legitimacy perspective

In this paper, we focus on a relatively underexplored aspect of sustainability—workforce reductions. We investigate the determinants and consequences of the decisions made by French firms to use press releases in order to announce downsizing operations. We also examine whether the content of press releases has an impact on investor reactions to downsizing announcements. Particularly in the French context, downsizing operations reflect negatively on corporate social responsibility with respect to employees, and we anticipate that French managers will use disclosure strategies to counter a potential legitimacy threat. Our sample consists of 227 downsizing operations announced between 2007 and 2012 by 119 French listed firms. We find that the disclosure of press releases is driven by both contextual and legitimacy factors. We also find that press releases are associated with more negative reactions to downsizing announcements than when there is no press release, particularly in the case of proactive operations (i.e., implemented by firms with improving performance). A content analysis of press releases indicates that firms, on average, engage in a reactive impression management strategy in their disclosure that consists of attributing downsizing operations to external factors. Moreover, investors penalize the use of proactive arguments, particularly when they are used to justify proactive operations. Overall, our results show that, in the French case, disclosure strategies and their consequences on the financial markets relate to a legitimacy perspective.