We studied three hundred downsizing US companies in an effort to discover the financial characteristics that distinguish them from companies which remain stable, and companies which grow in size. A second aim was to investigate whether the reason companies give for downsizing (cost reduction, productivity increases, reorganisation strategies) has an effect on the outcomes of downsizing.

To make sure that companies were actually engaging in a downsizing strategy, and not changing size for some non-strategic reason (eg. winding down, accidental property destruction), we content analysed the president's letter submitted as part of the annual report of each company. Basically, we searched the text for identifiable references to downsizing or intentional reductions in employee numbers.

Before the event, downsizing companies are generally larger than stable and growing companies, they also have lower profitability, lower sales per employee, but similar PE ratios. After downsizing, they experience a short lived boost in sales per employee which drops close to pre downsizing levels within two years. Growing companies display the reverse trend. Downsizers in general experience a slight drop in profitability, which recovers to initial levels after a couple of years. No trends were observed for PE ratios. It is worthy of note that even the significant differences were quite small in absolute terms.

Results were interesting when considering the strategic intent behind the decision to downsize. The most popular strategy was cost reduction, followed by reorganisation and productivity. Despite being the strategy of choice, cost reduction was not associated with improvements on any of the financial markers, and if given as the sole reason for downsizing actually resulted in lower sales per employee. However, downsizing to increase productivity alone lead to modest increases is sales per employee, that were sustained for at least two years. As perhaps a demonstration of desperation effects: companies that downsized for both reorganisation and cost reduction reasons started off with the lowest level of profitability, but managed to catch up with their competitors after downsizing.

It should be noted that all the effects discussed are statistically significant (by the accepted criteria), but represent tests of group effects, and hence involve *average* or group differences. All effect sizes were small. Very small.

The findings could be viewed as brain crushingly frightening, given that it appears that many companies downsize purely for the reason that other companies downsize. Combine this with the finding (not investigated in this study, but reported in others) that stock markets often react favourably (in the short term) to announcements of downsizing, and the fact that many top management team members own considerable chunks of company shares. Then try to figure out what often happens when a CEO is about to move on to another position and wants a tasty chunk of cash. It's also way bleedy cool when an annual report discusses the many and varied ways in which employees were canned, and then finish with a discussion of how management and shareholders can be rewarded for their dedication to productivity. Yes, downsizing is sometimes necessary, but much of the time it's just something that sounded good in the shiny magazine.