Counter to conventional wisdom, investors react negatively to announcements by firms to downsize their workforce. This begs the question whether and how top managers of downsizing firms try to attenuate the negative investor reaction to preserve investors’ vital support. In our paper, published in the Journal of Management Studies, we shed light on this critical question. In one of the most comprehensive empirical studies on workforce downsizing in management research so far, we find that the release of other positive news simultaneously to a downsizing announcement – an impression management tactic known as impression offsetting – is a common and effective influence tactic that averts significant declines in capital market valuation around downsizing announcements.

The “Downside” of Downsizing and Impression Offsetting

34 of 37 prior empirical studies on investor reaction to downsizing announcements find that investors react negatively to workforce downsizing, as evidenced by an abnormally high decline in share price around downsizing announcements. Top managers of downsizing firms are thus strongly motivated to engage in impression management tactics to attenuate investors’ negative reaction. However, just a single study has so far examined whether managers use impression management in the context of downsizing, and no study to date has identified an influence tactic that effectively attenuates investors’ negative reaction to downsizing announcements. So, we sought to find out whether top managers try to lift investors’ mood and confidence in their firm when forced to communicate workforce downsizings and whether such influence tactics help limit the downside of downsizing.

Drawing on impression management literature, we theorize and find that, when top managers decide to downsize, they are likely to anticipate investors’ negative reaction and release an abnormally high number of positive news items (e.g., dividend increases, customer wins, new products) simultaneously to workforce downsizing announcements to offset investors’ negative impressions. Further, our study shows that managers’ impression offsetting attempts are indeed effective, as reflected in substantively more positive investor reactions.

Implications for Research and Practice

These results have several important implications. Our study extends the scarce research on impression management around downsizing and is first to show how managers attempt to attenuate investors’ negative reaction to downsizing announcements. Moreover, we advance prior research on impression offsetting by unpacking through which causal mechanisms impression offsetting influences investor perceptions and by challenging the assumption of prior studies that all types of positive information are equally effective in offsetting investors’ negative impressions.

Our work also provides several important lessons learned for top managers of firms forced to downsize, for investors, as well as for other relevant stakeholders, such as trade unions. Not only does our study provide top managers with important insights on how to preserve investors’ vital support when a firm is in financial trouble and needs it most, but it also cautions other stakeholders to be wary of managers’ impression management attempts around workforce downsizing announcements.