This study extends prior research on the impact of downsizing on corporate reputation by investigating how specific aspects of downsizing measures influence this relationship. Using panel data on the S&P 100 companies for the period 1990–2000, we find that downsizing affects corporate reputation negatively and that the size of the effect depends on the content and the context of the downsizing announcement. More specifically, we find that the motive for downsizing, the time period in which it is announced as well as the extent of previous layoffs significantly influence the reputational penalties that are associated with corporate downsizing. Our results thus elucidate how contextual factors of a downsizing decision can influence the extent of the reputational damage of this measure.
Since the late 1980s, many US-based firms have adopted downsizing programs and reduced their workforce in order to cut costs and improve their performance (Baumol, Blinder, & Wolff, 2003; Davis & Haltiwanger, 1999). In the US, the Bureau of Labor Statistics counted on average over 1300 mass-layoff events per month in the period 1995–2001, which resulted in millions of job losses (Bureau of Labor Statistics, 2017). Research on corporate downsizing has so far focused predominantly on analyzing the effects of downsizing on a firm’s performance and on employees (for an overview, see Datta, Guthrie, Basuil, & Pandey, 2010). Few studies, however, have investigated how downsizing influences other organizational outcomes, such as a firm’s creativity, innovative capability or reputation, although these are crucial to a firm’s performance. To our knowledge, only the studies by Flanagan and O’Shaughnessy (2005), Love and Kraatz (2009) and Zyglidopoulos (2003, 2005) have analyzed the impact of downsizing on corporate reputation. The findings of these studies concur that, on average, corporate downsizing has a negative impact on a firm’s external reputation. Moreover, they show that the relationship between downsizing and corporate reputation is moderated by firm-specific attributes, such as a firm’s age or performance. With these exceptions, however, research has so far neglected the impact of other contextual factors, particularly those that are associated with the downsizing announcement. Datta et al. (2010, p. 339) have lamented the lack of studies on how contextual factors affect the outcomes of downsizing. Responding to their criticism, we aim to address this gap and analyze how the contextual conditions that are associated with the downsizing announcement − namely, the motive for downsizing, the time period of the decision, and previous layoffs − influence the relationship between downsizing and corporate reputation. Corporate reputation is one of the most important strategic resources for firms (e.g., Fombrun, 1996; Roberts & Dowling, 2002; Weigelt & Camerer, 1988). Defined as “a perceptual representation of a company’s past actions and future prospects that describe the firm’s overall appeal to all its key constituents when compared with other leading rivals” (Fombrun, 1996, p. 72), corporate reputation can be regarded as a general organizational attribute that is based on stakeholders’ perceptions of a firm’s past actions. Reputation constitutes an intangible resource that is hard to replicate. Crucially, it can facilitate access to resources controlled by key stakeholders and in that way influence a firm’s ability to create and sustain a competitive advantage that ultimately results in better firm performance (Barney, 1991; Benjamin & Podolny, 1999; Deephouse, 2000; Fombrun & Shanley, 1990). Indeed, previous research has shown that corporate reputation is positively associated with a firm’s financial success (e.g., Deephouse, 2000; Eberl & Schwaiger, 2005; McGuire, Schneeweis, & Branch, 1990; Raithel & Schwaiger, 2015; Roberts & Dowling, 2002; Rose & Thomsen,2004). For that reason, managers seek to improve and sustain the firm’s good overall reputation through their strategic decisions and actions.