The effects of local community characteristics on the relationship between negative performance feedback and downsizing announcements

Abstract

Downsizing often triggers economic disruptions in affected communities, leading to scrutiny of and resistance toward downsizing firms. Despite potential repercussions, the influence of local community pressure on downsizing decisions remains underexplored. This study advances the downsizing literature by demonstrating how the local community, as an institution, influences these decisions. We show that while market logic justifies downsizing based on declining performance, community logic pressures firms to reduce the scale of downsizing to preserve community welfare. We find that although firms increase the scale of downsizing across their subunits in response to declining performance, the scale at each subunit is shaped by the strength of community logic in each locale. This strength is influenced by community characteristics, such as ethnic diversity, labor union membership, social capital, and political ideology. Our findings suggest that the tension between market and community logics guides firms in determining where and to what extent to downsize.