Thesis on "Downsizing" from a Princeton economics major~

[Avalon Sparks]

This was written by Jonathan Lurie, an economics major at Princeton University. The thesis traces the origin of downsizing, in terms of why and how managers presented a doom-and-gloom vision to workers (laying them off by the thousands) on one hand, and on the other hand, projecting a rosy view of the corporation to shareholders, so that the stock price would soar.

Here's a snip from chapter VIII. (The conclusion)

An analysis of the major downsizings in the US proved that downsizing was relevant news to firm value. More than half of the firms experienced statistically significant volatility on the day of the downsizing, but the actual returns did not indicate that firms that downsized were bid up. In fact, the daily return for several of the firms fell by more than two standard deviations. Once this issue was addressed in terms of expectations, the results became clear. Investors have an opinion as to how many workers the firm should downsize to optimize profitability, given business conditions. Firms that downsize below the market’s expectations were sold off. The prevailing reason is that by not cutting enough workers, the managers demonstrate that they don’t realize the precariousness of the firm’s current health. Investors realize that the firm, as it is currently managed, must be heading for disaster, and they dump the stock. The stock of firms that downsize more than expectations appears to be bought heavily following a downsizing. Presumably, the firm’s grandiose visions for the future excites investors, as a reorganization of the firm, and the divestiture of units that are not performing as well as expected will trim the fat, and improve firm value. The firm’s productivity is much higher than investors had surmised, so it can afford to cut more workers than expected and still produce the same top-quality output.

This is a definitely a long read and I have read all of it - but what I have read is very interesting, thought I'd share it~

http://www.geocities.com/WallStreet/Exchange/4280/

[jamesinca]

1. Very nice, all 130 pages of it

Thanks for posting, I will find time to read it over the next few days.

[Avalon Sparks]

2. I meant to say that~

I have NOT read all of it~ some of it's over my head mathematically.