Cure or curse: Does downsizing increase the likelihood of bankruptcy?

• Published in: Journal of business research Vol. 76; pp. 24 - 33
• Main Authors: Zorn, Michelle L., Norman, Patricia M., Butler, Frank C., Bhussar, Manjot S.
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.07.2017
• Subjects: Bankruptcy; Downsizing; Intangible resources; Organizational change; Resource-based view; Intangible resources; Downsizing; Organizational change; Bankruptcy; Resource-based view
• ISSN: 0148-2963; 1873-7978
• DOI: 10.1016/j.jbusres.2017.03.006

Downsizing is a common organizational practice, yet research on the outcomes of downsizing has produced mixed findings. To contribute to this debate, we use an organizational change perspective to investigate whether the large-scale changes inherent in downsizing set firms on a negative path that is difficult to overcome and ultimately increases the likelihood of bankruptcy. Additionally, we investigate what factors, if any, can mitigate this likelihood. To do so, we build on the resource-based view to suggest that valuable resources can reduce the likelihood that downsizing will lead to bankruptcy. We find support for our theorizing across a sample of publicly traded firms. Our findings suggest that downsizing firms are significantly more likely to declare bankruptcy than firms that do not engage in downsizing and that intangible resources help to mitigate this likelihood. We do not, however, find support for the role of physical and financial resources in preventing bankruptcy. •We theorize that downsizing disrupts organizations, which increases the likelihood of bankruptcy.•We investigate whether firms’ remaining resources might lessen this likelihood and help firms overcome these challenges.•We found that downsizing firms were more likely to declare bankruptcy than their peers that did not downsize.•We found that intangible resources help to reduce the likelihood of bankruptcy for downsizing firms.•Financial and physical resources did not reduce the likelihood of bankruptcy for downsizing firms.