Ranking the stars. A study into the effect of downsizing on firm reputation.

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In the last few decades, downsizing has become a common business practice worldwide. While downsizings are undertaken for its potential benefits, it can also have far reaching negative consequences. Previous studies have mostly focused on the effect of downsizing on performance and individuals. Studies into the effect of downsizing on reputation are limited and have only been conducted with the use of a criticized measurement method and among financially focused stakeholders. This is problematic as a favorable reputation is a strategic asset that brings along many (non-)financial benefits. Therefore, this study aims to confirm and extend prior research by examining the effect of downsizing on reputation amongst both financially focused and non-financially focused stakeholder groups and by using another measurement method, namely the Reptrak, that includes both financial and non-financial oriented dimensions in its measurement of reputation. Moreover, this study extends prior research by not only examining the effect of downsizing on overall firm reputation, but also on each dimension of reputation and for each stakeholder group, and by examining the influence of downsizing motive. A survey-based experiment was conducted and t-test analyses were used to test for significant differences in reputation before and after reading a fictional newspaper article announcing a downsizing. The findings indicate that downsizing has a negative effect on overall reputation. This effect was also found for each dimension of reputation and for every stakeholder group. Support for the hypothesis that downsizing motive influences the effect of downsizing on reputation was also found, which indicated that reactive downsizings are regarded less favorably than proactive downsizings. Management should bear this negative effect on reputation in mind when making the decision whether they should downsize or not.
Faculteit der Managementwetenschappen