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Corporate diversification and downsizing decisions: International evidence from sharp and sudden performance shocks

Ataullah, Ali; Le, Hang; Wang, Zilong; Wood, Geoffrey

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Authors

Ali Ataullah

HANG LE HANG.LE@NOTTINGHAM.AC.UK
Associate Professor

Zilong Wang

Geoffrey Wood



Abstract

While firms regularly reduce workforce following sharp performance decline, diversified firms may abstain from employment downsizing by transferring capital and labor between segments (the allocative flexibility effect). However, downsizing may be more likely if a performance shock leads to efforts to reduce inefficiency in resource allocation (the inefficient internal market effect). Using a large cross-country dataset, our results provide strong support for the inefficient internal market effect. We find that diversified firms are more likely to downsize and the national employment protection and union power laws moderate this link. We also find that diversified firms with more excess employment are more likely to downsize and that downsizing following major adverse performance shocks is associated with lower level of diversification and excess employment.

Citation

Ataullah, A., Le, H., Wang, Z., & Wood, G. (2022). Corporate diversification and downsizing decisions: International evidence from sharp and sudden performance shocks. International Review of Financial Analysis, 82, Article 102203. https://doi.org/10.1016/j.irfa.2022.102203

Journal Article Type Article
Acceptance Date May 6, 2022
Online Publication Date May 10, 2022
Publication Date Jul 1, 2022
Deposit Date Sep 5, 2022
Publicly Available Date Mar 29, 2024
Journal International Review of Financial Analysis
Print ISSN 1057-5219
Publisher Elsevier BV
Peer Reviewed Peer Reviewed
Volume 82
Article Number 102203
DOI https://doi.org/10.1016/j.irfa.2022.102203
Keywords Diversification; downsizing; performance shock; excess employment
Public URL https://nottingham-repository.worktribe.com/output/10908580
Publisher URL https://www.sciencedirect.com/science/article/pii/S1057521922001648?via%3Dihub

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