Shareholder Value and Workforce Downsizing, 1981–2006

Source: Jiwook Jung, Social Forces, Advance Access, First published online: November 18, 2014
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From the abstract:
This paper develops a theoretical account of the reconstruction of workforce downsizing as a shareholder-value strategy since the 1980s. This account has two components. First, building on resource-dependence theory, I suggest that growing corporate dependence on institutional investors makes firms susceptible to their demand for greater returns, especially when these institutional investors are blockholders and resistant to counter-pressure from managers. Second, building on Fligstein’s theory of conceptions of control, I suggest that the rise of shareholder value reorients managerial behavior, by changing the decision context in a way that induces managers to maximize shareholder value. Crucial to constructing this new decision context are a set of agency-theory prescriptions for reforming corporate governance. My analysis of downsizing announcements, drawing on a sample of 714 US firms between 1981 and 2006, shows that both the pressure from institutional investors and the new decision context encourage firms to downsize more frequently. By demonstrating how both pressure from investors and changed managerial decision contexts have contributed to the prevalence of workforce downsizing, this paper makes a strong case for the financialization of the American corporation, and contributes to the sociological research on growing job insecurity and income inequality over the past three decades.