Downsizing Essay, Research Paper

Corporate Downsizing

The U.S. economy was at the height of economic expansion, stocks were near all time highs, corporate profits were strong, and the unemployment rate was at its lowest in two decades. At the same time, the major corporations in the United States were firing workers by the hundreds of thousands, and job insecurity had risen to an extremely high level. What was also ironic was the fact that the corporations who were initiating the downsizings were considered to be some of the strongest and most profitable in the country. Although these events seem to be inconsistent, this is what has happened throughout the decade of the 1990’s.

Traditionally, downsizing was a direct result of a decline in the demand for a firm’s product and a tool for company survival. The first duty of an organization is to survive. Downsizing is a legitimate tool for survival but not necessarily the best choice for every circumstance. This would mean that fewer items needed to be produced, therefore less employees were needed. Downsizing was also used as a way to cut costs during times of recession. But, the downsizings observed in the 1990’s did not fit this mold. Instead of downsizing for survival, companies were using this as a strategic plan for creating an increase in stock prices. The intent of downsizings by these top corporations who were already very profitable was to become “lean and mean”. Downsizing will be examined as a strategic option that management can exercise in order to boost equity value.

Downsizing is defined as a reduction in the number of employees, and sometimes in the number of operating units within a company. It began as a strategy of weak corporations as a way to reduce the costs of the company. Shareholder wealth was the main concern, and companies were willing to do whatever they thought necessary to convince the market that the stock price should rise. The stock price had become more important in the decisions of top management because many companies were offering stock options to them as part of their salaries. Downsizing was being used as a survival strategy by corporations who were trying to increase their market values. It was often perceived as making a company more competitive in today’s global marketplace.

In typical downsizing, a profitable firm would announce to the public that it was firing a large percentage of its workforce. The idea was that the market would get excited and begin buying up the firm’s stock at a higher price. But, there are different views on how stockholders react to this kind of news.

The idea that downsizing increases stock prices is fueled by the belief that if earnings are to be maintained and improved, corporations have one alternative-cut costs. This usually meant cutting jobs because trimming the payroll seemed to be an easier way to increase profits in the short run. Downsizings also had everything that a company wanted when trying to increase stock prices-they were tragic and newsworthy and they showed that a company was serious about its cash flow. Downsizing not only reduces the number of employees, but often shrinks the number of management levels as well, and middle managers have been particularly vulnerable to downsizing changes. Downsizing is usually done by a company because of the perceived effect of more efficiency, resulting in cost reductions. This trend has emerged due to the idea that corporate downsizing will increase the stock price of a company.

In conclusion, the decade of the 1990’s has proven to be one of inconsistent events regarding various company’s efforts to downsize. Given a standard statistical and/or micro-economic scenario, a weak firm anticipates a slump in the demand for its products, and lays off workers, while a strong firm foresees a jump in the demand for its products, and hires more workers. However, as in this case regarding Delta and United Airlines, the need for companies to downsize has taken on somewhat of a different purpose. The aim of this study was to prove our assumption that the factor of downsizing has some effect on the stock prices of a company, which we considerd as a medium to measure the efficiency of a company in terms of the company’s financial position when downsizing occurs. The authors were able to conclude that downsizing does change the stock prices to some extent in certain cases and in other cases to a large extent. Even though this test involved only two companies- Delta and United Airlines- we have sufficient evidence to affirmatively draw the conclusion that, yes, when used as a medium to determine a company’s efficiency, the company’s decision to downsize does have a positive effect on its stock prices.