Managing the “Downside” of Downsizing: Firms' Impression Offsetting around Downsizing Announcements

Past studies indicate that investors perceive workforce downsizing negatively, as evidenced by negative short-term stock returns around downsizing announcements. Impression management theory suggests that downsizing firms thus attempt to offset investors’ negative impressions by issuing positive news around downsizing announcements, and that firms’ impression offsetting can attenuate investors’ negative response. In this study, we test these theoretical predictions but also unpack why and how impression offsetting positively biases investor perceptions. Prior work theorized that impression offsetting is effective because it dilutes investors’ attention and compels them to average positive and negative news items in their minds but did not clarify whether both causal mechanisms are operative, and which one is more powerful. We posit that impression offsetting influences investor response primarily by forcing them to mentally average positive and negative news. Further, our study provides a more nuanced understanding of investors’ mental averaging process. While prior work assumed that all types of positive news are received equally by investors, we argue that positive financial news offsets investors’ negative impressions more effectively than positive operational or social news. The empirical analysis of nearly 1500 downsizing announcements by the largest, public US firms between 2001 and 2020 mainly supports our theoretical reasoning.