The Strength of Showing Weakness: Organizational Supplication and Investor Reactions to Workforce Downsizing

Abstract

Strategy research usually assumes that displays of weakness are disadvantageous for firms. In this study, we challenge this assumption. We propose that deliberate displays of weakness can help firms preserve stakeholder approval when taking controversial decisions. To test this proposition, we examine the use and effectiveness of organizational supplication in the context of workforce downsizing. Building on impression management theory, we predict that firms portray themselves as weak through downward earnings management before workforce downsizing announcements, and that this supplication tactic helps attenuate investors’ negative reactions. Moreover, we posit that supplication paired with an efficiency-focused verbal justification for the downsizing is particularly effective at attenuating negative investor reactions to downsizing announcements, as an additional verbal justification lends authenticity to the downsizing firm’s supplication attempt. Yet, we also theorize that organizational supplication through downward earnings management is less effective if positive firm evaluations by security analysts and the business media make it appear inauthentic. The empirical analysis of nearly 600 workforce downsizing announcements by the largest listed U.S. firms between 2001 and 2020 supports our theoretical predictions.