Labour-cost retrenchment strategies in times of crisis: Comparing market reactions to flexible and rigid strategies

Abstract

Guided by an institutionally embedded resource-based view, this paper addresses two under-researched questions. First, what effects do flexible strategies for labor-cost retrenchment (e.g., wage-based and functional flexibility) have on firms' market value as compared with rigid strategies (such as pure downsizing)? Second, what effects do flexible strategies have, compared to rigid strategies, when firms have a high level of knowledge assets? We answer these questions by focusing on firms in the research context of a stakeholder-capitalism environment. The dearth of studies on flexible strategies is surprising when one considers that firms in many advanced economies deploy them widely to reduce labor costs during times of crisis. We address this research gap with a novel data set of 220 retrenchment announcements by Japanese firms. We find that announcing the adoption of flexible strategies is significantly and positively associated with a greater likelihood of the firm’s market value increasing. Further, flexible strategies are evaluated more positively if they protect knowledge assets. We attribute these effects to flexible strategies being perceived not only as a capability but also as a legitimacy signal – that is, as an effort to maintain capabilities in an environment characterized by long-term in-house employment and to align with the norms of the broader institutional landscape.