To Downsize or Not: The Influence of CEO Regulatory Focus on the Relationship between Financial Distress and Employee Downsizing
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2022-06-27
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en
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Abstract
Building on upper echelons theory, this study examines the influence of CEO regulatory focus as a moderating factor for the relationship between financial distress and employee downsizing. Financial distress is hypothesized to be positively related to employee downsizing. However, CEO regulatory focus is expected to moderate this relationship, such that CEOs high in prevention focus decide not to engage in downsizing when in financial distress, whereas CEOs high in promotion focus are expected to engage in downsizing when their firm is experiencing financial distress. To analyze these propositions, unbalanced panel data from the S&P500 index was used, consisting of 2195 observations from 2010-2020. Additionally, over 4000 shareholder letters from annual reports were collected and analyzed to capture the CEO regulatory focus construct. Logistic regression findings show that financial distress indeed increases the likelihood of workforce reductions. Additionally, CEO prevention focus does not moderate this relationship. Contrastingly, CEO promotion focus does have a moderating role, but in the opposite direction as anticipated. CEO promotion focus moderates the relationship, such that promotion-focused CEOs of financially distressed firms are less likely to engage in employee downsizing. Future work could focus on replicating this study with samples consisting of small and medium firms (SMEs) to see if the effects remain. Additionally, the inclusion of board data and performance outcomes could simultaneously strengthen and extend findings on the effect of CEO regulatory focus.
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Faculteit der Managementwetenschappen