The Impact of Earnings Expectations on Corporate Downsizing

We propose that due to financial market pressures, managers are forward-looking in their search and decision processes and focus on meeting performance targets set by the financial community. Using panel data on S&P 100 companies, we find that pressure felt by management to meet the analyst consensus earnings estimate influences the extent of corporate downsizing. Moreover, our results show that high levels of institutional investor stock ownership and CEO power attenuate managers' sensitivity to financial market pressures, while high levels of analyst coverage increase their sensitivity. Our paper provides greater insight into the influence that investment analysts have on companies by investigating the impact of earnings pressure on corporate downsizing, a major strategic decision that can occur across industries. By providing evidence that downsizing is undertaken in order to meet analysts' earnings estimates our study also contributes to our knowledge on the factors that motivate corporate downsizing. By finding that regardless of financial performance, firms utilize downsizing in order to meet analysts' earnings estimates, we expand our understanding of the role of the financial markets, and specifically earnings pressure, on corporate downsizing decisions