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The Effects of Financial Conditions and Managerial Ideologies on Corporate Downsizing: Some Evidence from the U.S. Investor-Owned Electric Utilities Industry,

Downsizing is frequently referred to as a cost reduction strategy, however reviews of the existing empirical evidence question if downsizing can actually reduce costs or contribute to long term increases in profitability and performance (Budros, 1997; Cascio, 1993). The current uncertainty about the financial consequences of downsizing suggests the need for a multivariate study to explain pervasive downsizing occurring in the 1990s. The purpose of this study is to explore the financial and ideological determinants of corporate downsizing. Relatively little research has explored the potential causes of down-sizing, though several researchers have expressed concern over the lack of empirical studies investigating critical drivers of downsizing Specifically, the model developed in this study explores multiple causal factors of down-sizing in the investor-owned electric utilities industry. Several current studies have found that firms do not necessarily improve their financial situation or improve productivitypose that other causes of downsizing play a prominent role. In essence, I argue that ideological forces influence decisions to downsize in addition to other reported reasons, such as cost reduction. I hypothesize that the top managers' desire to conform to managerial ideologies can explain variance in downsizing over and above economic and financial causes. One hundred and fifty-five investor-owned electric utility companies that were in existence over the time period 1992-1995 were studied. Data were collected by conducting a content analysis of the letters to shareholders portion of company annual reports and by consulting archival data. A structured questionnaire was administered to a select group of ten industry executives to discover managerial ideologies prevalent in the industry. A panel of experts was used at a later time to validate the ideological constructs. Results of the study support the general proposition that variation in downsizing cannot be fully explained by the variation in company profits, productivity, or overhead costs. The findings indicate that negative change in return on sales and negative changes in overhead costs can explain some of the variance in downsizing levels. The findings also indicate that companies with senior executives who believe strongly in the benefits of market competition are more likely to later downsize. In addition, firms undergoing merger and acquisition activity are more likely to downsize in the following year, while firms that offer Employee Stock Option Programs are less likely to downsize.