Relationships between Ownership Structures and Employee Downsizing: An Agency Theory Perspective

Based on 139 major employee downsizings undertaken by large U.S. firms in the manufacturing sector in 2008 and matched set of firms that did not downsize, our study examined the impact of equity ownership structures on a firm’s propensity to engage in downsizing. Using agency theory as our theoretical lens, we hypothesized relationships between the likelihood of downsizing and ownership by institutional ownership, inside directors and outside directors. Analysis conducted using conditional logistic regression revealed that while institutional ownership is positively associated with downsizing, high levels of insider ownership reduces the likelihood of such downsizing. No significant relationship was observed in the context of outside director ownership. Implications of our findings from the standpoint of researchers and practitioners are discussed.