Effects of Downsizing

Effects of Downsizing
Effects of Downsizing on Corporate Financial
Performances in Japan
by
To m o n o r i To m u r a
C E O , J a p a n M a n a g e m e n t R e s e a r c h I n s t i t u t e ( w w w. j m r i . j p )
C h a i r p e r s o n , J a p a n E R M A s s o c i a t i o n ( w w w. j - e r m . o r g )
L e c t u r e r, O k a y a m a U n i v e r s i t y, G r a d S c h o o l o f Te c h n o l o g y
Certified Fraud Examin er (C FE)
E x . E x e c u t i v e O ff i c e r, J a p a n A s s o c i a t i o n o f A d m i n i s t r a t i v e S c h i e n c e
Contact:
tomura@jmri.jp
FA X : + 8 1 - 5 0 - 1 4 0 2 - 5 1 5 7
S u i t e # 3 0 2 , 2 - 1 6 - 1 8 , H i g a s h i ya g u c h i , O h t a - k u
To k yo , 1 4 6 - 0 0 9 4
J A PA N
© 2 0 0 2 . To m o n o r i To m u r a . A l l R i g h t s R e s e r v e d .
Effects of Downsizing ii
Executive Summary
Japanese firms have faced long-term recession and tried to find out the ways to improve
corporate profitability. Downsizing is currently one of the most critical issues for the Japanese
companies. This research examines the effects of the downsizing on the corporate financial
performances in Japan. Some may think downsizing improves corporate profitability. However,
this research hypothesizes that the downsizing reduces the overall profitability due to hidden costs
of the downsizing. As for the change rates of stock prices of the firms, this study hypothesizes that
the change rates outperform the rate-of-change in the points of TOPIX (Japanese major stock price
index) through the downsizing.
To investigate the downsizing effects, three-year average net profit margins and the
change rates of the stock prices of the downsizing firms are taken as dependent variables based on
the downsizing implemented in the fiscal year 1997. The population of this thesis is the firms that
are registered with the first division of Tokyo Stock Exchange as large capital stocks. Japanese
popular CD-ROM databases are used to collect necessary data. According to previous researches,
this study assumes that the firms implemented the downsizing when the companies reduced the
workforce of the firms by more than 3% within the fiscal year. The average net profit margins of
the firms before and after the downsizing are tested by t tests. The change rates of the stock prices
before and after the downsizing are examined by chi-square tests. Both statistical tests are
performed based on the level of confidence at .05.
The data of the downsizing firms are also compared with the data of the non-downsizing
companies based on the average net profit margins. Consequently, the financial ratios are not
improved by the downsizing. The change rates of the stock prices of the downsizing firms
significantly outperform the rate-of-change in the points of TOPIX after the downsizing. This is
because investors expect the potential growth of the downsizing firms regardless of the actual
overall profitability.
To improve the overall profitability in the long-term, downsizing may not be an effective
corporate strategy. When the firms cannot avoid the implementation of downsizing, the top
managers should reduce the hidden costs of downsizing by open communications and inspired
leadership. However, downsizing arouses the expectation of the investors. To improve the change
rates of the stock prices, downsizing is an effective strategy for the firms. This study also discusses
the effects of the work-share for the Japanese firms as one of the possible options for the corporate
strategic planning. In either case, adopting the downsizing or the work-share as the corporate
strategies for the firms, top management should treat the employees as important human resources
and choose the best organizational change plans based on comprehensive costs and benefits
analyses of the planned changes.
©2002. Tomonori Tomura. All Rights Reserved.

Effects of Downsizing ⅲ
TABLE OF CONTENTS
Executive Summary…………………………………………………………………. ⅱ
List of Tables………………………………………………………………………… ⅲ
Chapter Ⅰ. INTRODUCTION………………………………………………. 1
Background……………………………………………………… 1
Purpose of study………………………………………………….. 3
Statement of the problem…………………………………………. 3
Data location……………………………………………………... 4
Assumptions……………………………………………………... 4
Time frame…………………………………………………….… 5
Limitation…………………………………………………….….. 6
Overview of paper……………………………………………….. 6
Chapter Ⅱ. LITERATURE REVIEW………………………………………... 8

Overview…………………………………………………….….. 8
Literature related to independent variable………………………… 8
Literature related to dependent variables…………………………. 10
Literature related to the effects of downsizing…..………………….12
Summary…………………………………………………….…. 15
Chapter Ⅲ. METHODOLOGY………………………………………………17
Overview…………………………………………………….….. 17
Population…………………………………………………….…..18
Sampling methods………………………………………………...18
Methods for data collection………………………………………. 20
Methods for data analysis…………………………………………21
Additional comments on Japanese banks………………………….23
Summary…………………………………………………….…...23
Chapter Ⅳ. ANALYSIS…………………………………………………….....24
Introduction……………………………………………………….24
Summary of statistical tests………………………………………...24
Interpretation of results…………………………………………….34
Summary…………………………………………………….…....36

Chapter Ⅴ. CONCLUSIONS………………………………………………… 37
Conclusions………………………………………………………..37
Recommendations…………………………………………………38
Discussion: Consideration of work sharing…………………………41
Future research needs………………………………………………44
References…………………………………………………….……………………….47

LIST OF TABLES
Table Number and Title Page
1. The Negative Consequences or Hidden Costs of Downsizing ………………………. 14

2. Downsizing Firms (Total: Net Profit Margins) ………………………………………25
3. Downsizing Firms (Total: Stock Price Changes) ………………………………….… 25
4. Downsizing by Profitable Firms (Net Profit Margins) ……………………………… 27
5. Downsizing by Profitable Firms (Stock Price Changes) …………………………… 27
6. Downsizing by Non-profitable Firms (Net Profit Margins) ………………………… 28
7. Downsizing by Non-profitable Firms (Stock Price Changes) ………………………. 28
8. Non-Downsizing Firms (Total: Net Profit Margins) ………………………………... 29
9. Non-Downsizing Profitable Firms (Net Profit Margins) ……………………………. 29
10. Non-Downsizing and Non-Profitable Firms (Net Profit Margins) …………………. 30
11. Profitable Firms (Before Downsizing Period: Net Profit Margins) …………………. 32
12. Profitable Firms (After Downsizing Period: Net Profit Margins) …………………... 32
13. Non-Profitable Firms (Before Downsizing Period: Net Profit Margins) …………… 33
14. Non-Profitable Firms (After Downsizing Period: Net Profit Margins) …………….. 33

Effects of Downsizing 1
C h ap t er One – Int ro duc t i on
Ko uno s u ke Ma t s us h i t a , t he foun de r of Ma t s us hi t a El e c t ri c
Ind us t ri al C o rp ora t i on, sa i d t o hi s s ubo rdi na t es , “ If so me bo d y as ks yo u
wha t yo ur c o mp a n y p rodu ce s , pl e as e ans we r t h e p ers on t ha t ou r
c omp a n y p rod u ce s h u ma n re so ur c es an d, a dd i t i ona l l y, we p r o duc e
e l ect ri c p ro du ct s .” ( Is e, 200 2, p a ra . 4).
Ba ck grou nd
J a pa ne s e co rpo ra t i o n s h av e b e e n s t ru g gl i n g wi t h s ev ere rec e s s i on
s i nce t h e c ol l a ps e o f bu bbl e pro sp er i t y. C o y (2 002 ) rep o rt ed t ha t
Ni kkei 2 25 -s t oc k i n de x (Ni kkei ) h a d r e co rde d t he hi gh e s t p oi n t at
38 ,91 5 o n Dec emb er 29 , 19 89 , howe ve r, t he Ni kke i (at 979 1. 4 3 po i nt s
on Fri da y, Fe b ru a r y 1, 2 00 2) fel l b el o w t he Do w Jo ne s In du st ri a l
Ave ra ge (a t 99 20. 00 p oi n t s o n Th urs da y, J a nua r y 3 1, 2 002 ) f or t he fi rst
t i me s i nc e 195 7. Ac co rdi n g t o Yo s hi da ( 19 98), J a pa n e se fi r ms ha d t o o
op t i mi s t i c vi e ws t o ov erco me t h e s eri o u s ec on o mi c s i t ua t i on at t h e
be gi n ni n g o f t h e 1 9 9 0s be ca us e t h e fi r ms be l i ev e d t h at J a p a ne se
man a ge men t s ys t e m s we re e x c el l e nt . Oh ba (200 1) po i nt e d o ut t ha t ,
un t i l 19 93, mo st o f al l J a pa nes e fi rms c o ul d n’t s eri ou s l y re a l i ze t he
ne c es si t y of c orpo r a t e do wn s i zi n g.

Kwon (20 01) e x p l ai n ed t hat Ja pa n e se fi rms h a dn ’t ad op t ed l a yo ffs
on a l arge s ca l e b ut kep t l on g-t er m co nt r ac t s wi t h t he e mp l o ye e s b as ed
on i mpl i ci t con t ra c t t he or y. Thi s i s be ca us e t he co mp an i es c o ul d
pro vi de e nou gh s a l a ri e s an d po s i t i ons i n t he wo r kpl a ce s fo r t he
e mp l o ye e s u nt i l t h e mi d 1 990 s (Kwo n, 2 0 01 ). Ho wev er, t h e
gl o ba l i z a t i on of J ap an es e c orp or at e a ct i v i t i es , t he ad ve nt o f an a gi n g
s oc i et y, l ow e co no m i c growt h , an d s o fo rt h mad e J ap an es e ma n a ge me nt
s ys t e ms su ch as l i fe t i me empl o ym en t s ys t em or s e ni ori t y or de r wa ge
s ys t e m c ol l a ps e ( Ko s u gi , 19 99 ; Su z u ki , 20 01; Tri p od , 20 01). Ac co rdi n g
t o C l a rk (1 998 ), t he nu mb e r of b an krup t ci e s i n J ap an d ra ma t i ca l l y
i nc rea s ed si n ce 19 9 7. The Mi n i st r y o f Fore i gn Affa i rs (2 00 2 ) s howe d
t ha t t he J ap an es e un e mpl o yme nt ra t e s h a rpl y i nc re a se d b y 1 .3% fo r 2
ye a rs : Un e mpl o yme nt ra t e wa s 3.4 % i n 1 99 7, 4 .1% i n 19 98 , an d 4 .7% i n
19 99 . C NN.c o m (20 01 ) re po rt e d t h at t h e J a pa n e se un e mpl o ym en t r at e i n
Nov em be r, 20 01 wa s 5.5% a nd con s u me r pri c e i n d e x h ad be en drop pi n g
for 2 6 s t rai ght mont h s unt i l No ve mb e r, 2 001 .
Ya m an e (1 999 ) a rgu ed t ha t t he hi ghe r fi x ed co st s s uc h a s
pe rs onn el e x p en se s , fi nan ci n g c os t s , an d s o fo rt h ha d b e e n b urde ns on
c orpo ra t e profi t a bi l i t y wh i l e t h e re ce ss i o n ha d d ec re a s ed t h e re v e nu es
of t h e fi r ms. Th e re f ore , t he pr e ss ure for c os t redu ct i o n d rov e t he
c omp a ni e s t o i mp l e me nt do wns i zi n g t o i mp ro ve t h e fi na n c i al c on di t i on s

of t h e fi r ms. Ho w ev e r, a s T h e Eco no mi c Pl an ni n g A ge nc y (1 999 )
po i nt e d o ut , t h ere wa s a d i l e mm a: On t h e o ne ha nd t h e co rp ora t e
do wns i zi n g m ad e i t p os s i bl e fo r t he fi rms t ha t i mpl e me nt e d t he
do wns i zi n g t o i mp ro ve t he co s t st ru ct u re of t h e fi r ms, b ut o n t h e o t her
ha nd t he co rpora t e d owns i z i n g cou l d m a ke t h e re c es si o n wo rs e i n t h e
t e rms o f t h e J ap an es e ec on o m y a s a who l e.
Pu rp os e o f St u dy
T he purp os e o f t hi s pa pe r i s t o i nv es t i ga t e t h e e ffe c t s o f
do wns i zi n g o n t h e c orpo ra t e fi n an ci a l pe rfor ma nc e s i n J a pa n.
Downs i z i n g i s b oo m i n g a mo n g J a pa ne s e fi rms . It i s i mp ort a n t for
s t rat e gi c pl a nn e rs i n e ac h fi r m, i nve s t or s , or ot h er s t a ke h ol d ers t o know
whe t he r t he down si z i n g bri n gs fa vo ra b l e e ffe c t s fo r t h e c o rp orat i o ns
t ha t i mpl e me nt e d t h e d owns i z in g.
Sta t eme nt o f t he Pro bl e m
T he purp os e o f t hi s res ea rch i s t o e x a mi n e t h e e ffe c t s o f
do wns i zi n g o n t h e c orpo ra t e fi n an ci a l pe rfor ma nc e s i n J a pa n. The re a re
t wo h yp ot he s es of t h i s s t ud y. Th e fi rs t h ypo t he si s i s t ha t , b e fore t he
do wns i zi n g, t h e fi r ms a ch i ev e b et t e r fi na nc ia l p e rfor m an ce s t h an t he
on es a ft e r t he do wn s i zi n g i n t er ms o f t hree - ye a r a v e ra ge n et p ro fi t
ma rgi ns . The s ec on d h ypo t he si s i s t ha t t he rat e s o f ch an ge s i n t he st o ck
pri c es o f t h e fi r ms t hat ado pt e d t h e d o w ns i z i n g o ut p e rfor m t he rat e o f

c ha n ge i n t h e p oi n t s o f st o c k pri c e i n de x aft e r t he do wn s i zi n g.
Dat a Loc at i o n
T hi s res ea rch us es Ka i sh a S hi ki h ou C D-R OM P e rfe c t Ve rs i o n
20 00 (Shi ki hou , 20 0 0) a nd 20 02 (S hi ki h ou , 200 2). S hi ki h ou (2 00 0,
20 02 ) we r e p ub l i sh e d b y To yo Kei z a i Sh i n po-s ha i n To k yo. The se
C D-R OMs ha v e i n t ot a l , t e n- ye ar c o rpo rat e fi n a nc ia l d at a a n d fi ve - ye ar
da t a ab out t h e n u mb e r of e mp l o ye e s i n J a pa ne s e c o mpa ni e s r e gi s t e re d
wi t h t h e J a pa nes e st o ck m ar ke t b a s ed on a nn ua l rep ort s of t h e fi r ms .
Th es e C D-R O Ms pu bl i s he d b y t he fi r m a re o n e of t h e mos t us e fu l da t a
s ou rc es i n Ja p a n.
T hi s st u d y wi l l t e s t t he fi rs t h ypo t he si s wi t h p ai re d t -t e st s . Th e
s ec on d h ypo t he si s w i l l be ex ami ne d b y c al c ul a t i n g t he r at e s o f ch an ge s
i n t h e p oi n t s o f TOP IX (i .e., J a pa ne s e ma j or s t oc k p ri c e i nd ex ) a nd i n
t he s t oc k p ri c e s o f t he fi r ms t ha t ad opt e d t h e d owns i z i n g ba s e d o n
c hi -s qua r e fo r i nd e p e nd en c e t es t s wit h 2 x 2 c on t i nge nc y t a b l e s . TO P IX
ye a rl y da t a a nd i nfo rm a ti o n o n m ar ket c ap i t al i n To k yo St o c k Ex c ha n ge
(TSE) a r e a v a i l ab l e a t TSE (2 00 2b, 2 00 2 c ).
As s umpt i o ns
T hi s st u d y as s u mes t ha t t he fi r ms i mpl e me nt e d t h e d owns i z i n g
whe n t h e r a t es of c h a n ges i n t h e n u mbe r of t he e mp l o ye es w e re
de c re as e d b y mo re t ha n 3% wi t hi n a fi s c a l ye ar. Thi s i s be ca us e t h ere

a re di ffe ren c e s b et w e en t he nu mb e r of t h e e mpl o yee s t h a t a re a c t ua l l y
di s mi ss e d a nd t he n umbe r of t h e e mp l o ye e s t o be l a i d o ff a nn oun ce d b y
t he c o mpa ni e s b efor e t he i mpl e me nt a t i o n of t he do wn s i zi n g. Th e
s t an da rd r at e of c ha n ge i n t h e numb e r o f t h e e mp l o ye e s wh i ch i s 3 % i s
de t e rmi ne d b as e d o n t he pre vi o us r es ea r ch b y C as ci o (199 8 ) .
An ot he r as s u mpt i o n i s t ha t J apa ne s e re c e ss i o n c au se d d ec re a se s i n
rev en u e s o f e a ch co mpan y a nd i n t h e p o i nt s o f TOP IX t h at wa s t he
s t ock p ri c e i nde x o f t he firs t di v i s i on o f TSE wh ere J a pa n e s e m aj o r
fi rms w e re re gi st e re d . TOP IX s hows t he move m en t of t ot a l cu rre n t
ma r ke t p ri c es o f a l l t he fi r ms i n t he fi rs t di v i s i on o f TSE (T S E, 20 02a ).
Hen ce , t hi s s t ud y s e t s p opu l at i o n ba s ed on t he fi r ms ca t e gor i z ed i nt o
l a rge -c ap i t al s t oc ks i n t he fi rs t di v i s i on o f TSE b ec au se t he
l a rge -c ap i t al s t oc ks h av e a gr e at i mpa ct o n TOP IX.
Ti me Fr ame
T hi s st u d y fo cu s es o n t he fi rms t ha t i mp l eme nt e d t he do wns i zi n g
i n 1 99 7 whe n t h e J a pa ne se un em pl o ym e n t rat e st a rt ed i nc r e a si n g
rap i dl y. In t h i s r e se a rc h, t he t h ree - ye ar c orpo r at e fi na n ci a l da t a be fo re
a nd a ft e r t h e d owns i z i n g wi l l b e u se d t o t es t t he h ypo t h e se s t o e x a mi n e
t he l on g-t e rm e ffe c t s o f t he down si z i n g as organ i za t i on al c h a n ge s . It i s
i mport a nt fo r J a p a n e se fi r ms or o t h e r st a ke ho l de rs t o kno w t he
e ff e ct i v en es s for t he s t ra t e gi c pl a nni n g.

Li mi t at i o n
T he dat a i n t he C D- R OMs ma y i nc l ud e a l l empl o ye es who a re i n
do mes t i c b ran ch e s a n d i n ove rs ea s b ran c h es i n t h e fi r ms. In ca s es of
me rge rs an d a cq ui s i t i ons , t h e s c re e ni n g s ys t e ms i n t he C D-R OMs s h ow
t he res u l t s b as ed on t he da t a o f res ul t i n g c orpo ra t i on s as a w h ol e . If t he
s t ock c ode s of t h e c orpo rat i on t ha t i mpl e me nt e d t h e d owns i zi n g a re
c ha n ge d o r el i mi na t ed , t hi s s t ud y e x cl u de s t he fi r ms fro m t h e dat a t o
t e st t h e h yp ot h e s es . Thi s i s be ca us e t h e ch an ge d o r e l i mi na t e d st o c k
c ode s me an t h e fi r ms t ha t ha d t h e c od es were b a n krupt o r di s so l ve d. It
i s no t prop er for t e s t in g t h e h yp ot he s es of t h i s re se a rc h b as e d on t he
l on g-t e rm e ffe c t s o f t he down si z i n g t o i n cl u de t hes e fi rms i n t h e s a mp l e
of t h i s s t u d y.
T hi s res ea rch d e al s wi t h t h e fi rms t h at e x i s t ed from Ma r ch o f
19 95 t o Ma rch of 2 0 01 as t h e s a mp l e o f t h e re s e a rc h. In ad di t i o n, t h e
s ampl e i s t a k en fro m t h e fi rms t h a t re l e a s e t h e a nn ua l re p or t s e ve r y
Ma rch as t h e s et t l e men t t e rms t h at a r e p op ul ar i n J ap an. As fo r t h e
s t ock p ri c es a nd t he st o ck p ri c e i n de x p o i nt s , t he da t a abo ut a l l s t oc k
pri c es a nd TO P IX yea rl y d at a ar e ba s ed on t h e c l os i n g p ri c e s .
Ove r vi e w of Pa pe r
T he e ffe c t s of do wn s i zi n g on t he c orpo ra t e fi n an ci a l pe r for ma n c e s
a re a na l yz e d to t e st h ypo t he s e s . Int rod u c t i on (i n cl u di n g pu r pos e of

s t ud y, s t at e men t of pro bl e m, a nd so fo rt h) i s i n cha pt e r on e. A li t e rat u re
rev i ew o n i n d ep en de nt a nd de pe nd e nt v a ri a bl e s a nd t he effe c t s of t h e
do wns i zi n g wi l l be he l d i n ch ap t e r t wo. De t ai l e d me t hod ol o gi e s wi l l b e
s ho wn i n c ha pt e r t h r ee . Ana l ys i s on res e a rch fi ndi n gs wi l l b e pre s e nt e d
i n c ha pt e r four. Fi na l l y, t he re s ea r ch wi l l b e c on cl u de d i n ch apt e r fi v e .

C ha pt e r Two – Li t e ra t ure R ev i e w
Ove r vi e w
In t hi s ch ap t er, a l i t e ra t ur e rev i ew i s pr e se nt e d. Fi rs t , t h e
l i t e ra t ure r el a t ed t o t h e i n de pe nde nt v ari a bl e (i .e., t h e c orp o rat e
do wns i zi n g) i s rev i e wed . S e co nd , t he de pe nde nt v ari a bl e s (i .e ., t he
a ve ra ge ne t p ro fi t m a rgi ns a nd t he ra t e s o f t he ch an ges i n t h e st o c k
pri c es ) a re c ons i de r ed t hrou gh t he l i t er a t ure re vi e w. Th en, t he effe c t s
of d owns i z i n g o n t h e c orp o rat e fi na nc i a l p erfor man ce s are e x pl ai n ed
ba s ed on t he opi n i o n s o f t he ex pe rt s o n t he do wns i zi n g.
Li t e r at ure R el a t ed t o Ind ep en d e nt Var i a bl e
Ac co rdi n g t o Hi l l a nd Jo ne s (2 001 ), t he re a r e t h re e ma j or w a ys t o
pu rsu e s t rat e gi c c h a n ge s t o i mprov e t h e c omp e t i t i ve po wer o f t h e fi r ms
(i .e. , re e n gi n ee ri n g an d E-e ngi n ee r in g , i n no va t i on, a nd res t r uc t uri n g)
a nd t h e d owns i z i n g i s c at e go ri z e d i n t o t he res t ru c t uri n g. R ob bi n s
(19 97) p oi n t ed out t h at t h es e orga ni z at i o na l ch an ge s we r e d ri v en b y t he
e nvi ro nm en t al c h a n ges s u ch a s t e ch no l o gi c al c ha n ge s , e co n omi c al
c ha n ge s , ch an ge s i n t he co mp et i t i v en es s i n e ac h i n dus t r y, an d s o fort h .
R a mu (1 99 9 ) ex pl a i ne d t ha t t he r e we re t hre e t ype s o f re s t ru ct u ri n g (i .e .,
po rt fol i o re st ru ct u ri n g, fi n an ci a l r es t ruc t uri n g, an d o rgan i za t i on al
res t ruc t uri n g) an d t h e d owns i z i n g wa s o ne of t h e t ype s o f t he
organ i z a t i on al re st r uc t uri n g. Th e c orp or at e do wns i zi n g i s ai me d t o

ma k e t h e o pe ra t i on of t h e fi r ms more effi c i en t (G a u gha n, 2 0 02 ). The
c orpo ra t e down si z i n g i s i mp l em en t ed t o l o we r bu re a uc ra t i c c os t s an d t o
reb ui l d a fl a t t e r a nd dec e nt r al i z ed o rgan i za t i ona l s t ruc t ur e ( Th omps on
& St ri c kl an d, 1 99 8 ).
As Lu ri e (20 02 ) e x p l ai n ed , down si z i n g r ed uc es t he ov er a l l
wor kfo r ce of t h e fi r ms a s a de c i si o n o n t he pa rt of man a ge m en t . C a sc i o
(20 02) re v e al e d t h at t wo-t h i rds of t he c o rpo rat i on s t ha t ex ec ut e d
wor kfo r ce r ed uc ti o n s i n a gi ve n ye a r wo ul d d o t h e a dd i t i ona l j ob cu t s
i n t h e fo l l owi n g ye a r. As Won g (199 9) e x p l ai ne d, down si z i ng ma y
i nc l ud e t h e r e du ct i o n of h i ri n g n ew gra d u at e s , ea rl y re t ir e m ent s a nd
t ran s fe r t o a ffi l i at i on s , l a yo ffs, an d s o f ort h . Lu ri e (200 2 ) p o i nt e d o ut
t ha t t he re w e re t wo t ype s o f do wns i zi n g: t he do wns i zi n g for s urv i va l
un de r c ri s es a nd t he down si z i n g as a st r a t e gi c t e ch ni qu e t o man i pul a t e
t he c orpo ra t e pro fi t a bi l i t y to a t tra ct s h a re hol d ers an d o t he r
s t ak eh ol de rs . Lu ri e (2 00 2) i mpl i e d t h a t t he res e arc he rs s ho u l d h av e
foc us ed at t e nt i o n o n t h e d i ffe ren ce s i n t he effe ct s of t wo di ffere nt t yp e s
of d owns i z i n g o n t h e c orp o rat e p e rfo rma nc e s i n t he fut ure s t udi e s .
Acc ord i n g t o Th e E c on omi c Pl a nn i n g A ge n c y (19 99 ), J a pa n e se
c omp a ni e s t e nd ed t o d owns i ze t he wo r kf o rce wh en t he fi rms rea c hed
de a dl oc k i n t e rms o f t he co rpor a t e s t r a t e gie s . Add i t i ona l l y, c o rp ora t e
do wns i zi n g i s no t ai me d t o i n c re as e co mp et i t i v e a dv ant a ge s but t o

red uc e c o mpe t i t i ve di s a dva nt a ge s (Dr. S . Fox - Wol f gr a m m, pers on al
c om mu ni c at i o n, Ma r ch 11 , 20 02 ).
In t hi s s t ud y, t h e i m pl e me nt a t i on of t he c orpo ra t e down si z i n g i s
de fi ne d a s t h e wo r kf orc e re duc t i on b y mo re t h an t hr ee pe rc e nt wi t h i n a
fi s ca l ye ar (3 % rul e ) ba se d o n C a s c i o (1 998 ). The r es e arc h e s ( Lo , 19 99;
Ma l u z o, 2 00 0; Yo sh i da , 19 99) b as e d on de t ai l e d i n for mat i on de ri ve d
from t h e an no un c e m e nt o f t h e i mp l e men t at i o n of t h e d owns i z i n g b y t h e
fi rms d ea l t wit h l i m i t ed sma ll sa mp l es . Th es e st u di e s d i dn ’t re ve al t he
e ff e ct s o f th e do wn s i z i n g on t h e c orp o ra t e fi na nc i al p erfo r m an ce s b a se d
on a l arge s i ze s amp l e be si d es t he c o mp a n y- s pe ci fi c e ff e ct s . As Ko ma ki
(19 98) p oi n t ed out , i t i s i mpo rt an t t o de a l wi t h a l a rge s i ze sa mpl e t o
i nv es t i ga t e t he e ffe c t s as a n ov er a l l i s su e.
Li t e r at ure R el a t ed t o De pe nd e nt Var i ab l es
In t hi s r es e a rch , t he t hre e- ye a r av e ra ge n et p rofi t m argi n i s se t a s
t he fi rst d ep en d e nt v ari a bl e. The pro fi t ma rgi n s ho ws a n o v e ral l
c orpo ra t e profi t a bi l i t y a nd i t i s de ri v ed f rom n e t i nc o me d i vi de d b y
s al e s re v e nu es ( Ant ho n y, Haw ki ns , an d Me rc h an t , 19 99 ; St u b bs , 20 02 ).
App el b au m, B e rg, & B ak er (1 996 ) po in t ed ou t t ha t prod uc t i vi t y growt h
pro gres s ed gr a du a l l y. The s t udi e s (Ca s c i o , 19 98; On g, 2 000 ) wer e bas e d
on t he ne t pro fi t ma rgi ns t o i nve s t i ga t e t h e e ffe c t s o f do wn s i z i n g.
Yo sh i da (1 99 9) a nd Lo (1 9 99) u se d n et i n co me a s t h e d ep en de nt

va ri ab l e t o t es t t h e h ypo t he si s b ut wh a t s ee ms t o be l ac ki n g was a
c ons i de rat i o n o f t he ec ono mi c s i t ua t i on s : t h e re ce ss i o n or t h e p ros pe ri t y.
If t he fi rms i mpl e m e nt e d t he d owns i zi n g u nd e r t he bo o mi n g ec ono m y,
t he ne t i nc o me of t h e fi r ms mi gh t t en d t o i n cre as e be ca us e o f growt h i n
t he s al e s re ve nu es . I n t h e s a me w a y, t he ne t i nc om e of t he do wns i ze d
fi rms mi gh t t en d t o d ec r ea s e d u ri n g t he de pre ss i on . At t hi s po i nt , t h e
fi rst d ep en d e nt v ari a bl e i n t hi s re se arc h i s pro pe r t o t es t t h e fi rs t
h ypo t he si s wi t h t h e c on si d era t i on of t h e s al e s re v e nu es .
T he se co nd d e pe nd e nt v ari a bl e i s t h e r a t es o f c h a n ges i n st o ck
pri c es o f t h e fi r ms t hat i mp l e men t ed t he do wn si z i n g. Th e s t oc k p ri c e s
a re d e fi ne d a s t he p e rc ei v ed va l u e s b y s ha reh ol d e rs an d s t oc k ma r ket
pl a ye rs i n t e rms of e x pe c t at i on s (Luri e, 200 2). Th e re fo re, t h e s t oc k
pri c es a re n ot t he re a l ret u rns of t h e fi r ms . Yo ko ya ma (20 0 2) re port e d
t ha t s t oc k o pt i on pl a ns for J ap an es e fi r ms we re l e ga l i ze d i n 19 97. As
Ta ka ha sh i ( 20 00) s t a te d, i t be c a me i mp ort a nt for J a p a ne s e fi rms t o
c ons i de r t he s t oc k p ri c es i n co rp ora t e d ec i si o n- ma ki n g d ue t o t h e
c ha n ge s i n t h e c orp o rat e go ve rn an ce of J ap an es e co mp an i es (i .e.,
i nd i rec t fi na n c e wi t h s t ron g s up po rt fro m b an ks w as ch an ge d t o di rec t
fi na nc e fro m t h e s t o c k m arket ).
C a s ci o (1 99 8) a l so i nve s t i ga t ed t he e ff e c t s of t he d owns i zi n g o n
t he c ha n ge s i n t he s t oc k p ri c e s. On g (20 00) c on t ras t ed t he r at e s of t he

c ha n ge s i n s t oc k p ri c e s a nd t he rat e s o f t he ch an ge s i n t he p o i nt s of a
maj o r st o c k pri c e i nd ex t o e x a mi n e t h e e ff ec t s of t he do wns i zi n g. In
t hi s re se ar c h, t h e fo rm e r ra t es a re c o mp a red o r co nt r a st e d w i t h t he ra t e s
of t h e c ha n ges i n t h e p oi n t s o f TO P IX. Acc ordi n g t o T SE ( 2 002 a), t h e
po i nt o f TOP IX i s d eri v ed fro m t o t al m a rk et v al u e i n t he fi rs t d i vi s i on
of T SE di v i d e d b y a ce rt ai n st a nd ard t o t al ma rket v al u e t i m e s o ne
hu nd re d.
Li t e r at ure R el a t ed t o t h e Eff e ct s o f Do w ns i z i ng
Ac co rdi n g t o Fra h m e (2 00 2) a nd Li p pe r (200 2), d owns i zi n g
i nc rea s ed co rp ora t e p ro fi t s. Ku ni i (20 00 ) imp l i ed t ha t t he do wn si z i n g
was t h e met h od s fo r t h e fi r ms t o bo os t t he pro fi t ma rgi ns . H owe ve r,
e ve n t ho u gh t he s e a rgu me nt s ab o u t t he d own si z i n g effe ct s o n t he
c orpo ra t e profi t a bi l i t y a re lo gi c al l y co rre c t und er c et e ri s par i b us
c ond i t i on s, t h e re al re su l t s are di ffe re nt from t h e a rgu men t s . As
Gre gor y (1 999 ) po i n t ed ou t , t he re w a s l i t t l e res e a rc h s howi n g t h at t h e
organ i z a t i on al p er fo rm an ce s we r e i n cr e a s ed as t h e r e su l t of do wns i zi n g.
Lu ri e (20 02) i n di c at e d t h at i f t h e t o t al w a ge bi l l of t h e d own s i ze d
c omp a n y wa s not c h a n ged ev en a ft e r t he wo r kfor c e r e duc t i o n be ca us e
t he s urvi v or of t h e d owns i z i n g wi t h i nc r ea se d p rodu ct i v i t y wou l d b e
pa i d a hi ghe r s a l a r y, t he c orpo ra t e pro fi t a bi l i t y cou l d n ot b e i n cre as ed
b y t he do wns i zi n g. Mo r eo ve r, Fr ah me ( 20 02) a nd Downs (2 0 02)

refe rr ed t o t he un i nt e nd ed co ns eq ue n ce s of t he do wns i zi n g s uc h a s
ne ga t i ve i mpa ct s on t he mo r al e of t h e e mp l o ye e s i n t he do wn si z i n g
c orpo ra t i on s an d hu ma n re l at i o ns a mo n g t h e o t h e r st a ke ho l de rs .
T hes e as p e c t s a re c o n si d ere d a s “ hi d den co s t s o f ret ren c h me n t ”
( Fe en e y, 20 01, pa ra . 1) o r “s ur vi v or s yn drome ” ( C om mi t t e e fo r
Ec ono mi c De v el o pm en t of Au st ra l i a, 2 0 0 0, pa ra. 5 ). As Ame ri ca n
Ps yc ho l o gi c a l Ass oc i a ti o n (1 997 ) po i nt e d ou t , do wn s i zi n g cr e at e s ma n y
ne ga t i ve ps yc ho l o gi ca l an d b eha vi o r al r e su l t s fo r al l o f t he su rvi vo rs.
Downs i z i n g ca us es di s t rus t ful p s ych ol o gi c al re l at i on s hi ps b e t wee n
l a bor a nd ma n a ge me nt (Ara i , 200 1; Ko n o & C l e gg, 199 8). T h e m a in
ne ga t i ve ps yc ho l o gi ca l or be h a vi o ral c o ns e qu en c e s fo r t h e su rv i vo rs o r
t he hi d de n c os t s of do wns i zi n g a re s ho wn i n Tab l e 1 . Th o se po ss i b l e
ou t co me s ar e de ri v e d fro m t he ex pe rt s’ o pi ni o ns . Th e s uc c e s s o f
reo rga ni z at i o n of t h e fi r ms b y t h e d own s i z i n g h e a vi l y de pe n ds o n t he
ps ych ol o gi c a l co nd i t i ons of t h e s u rv i vo rs (B ac a l , 20 02; Lu f ki n , 200 1).
As It a mi a nd Ka go n o (1 98 9) a rgue d, wh e n t h e e ffe c t s of
do wns i zi n g we re e x ami n e d, not o nl y ac co un t i n g o r ec on o mi c a s pe c t s
bu t al s o ma n a ge ri al i s su es mus t be c o ns i de red t o get h er. Dow n s (2 002 )
po i nt e d o ut t ha t t he ne ga t i ve c ons e que n c es o f down si z i n g ou t we i gh ed
t he us u al c os t red u c t i on e x p ec t ed fro m t he down si z i n g. Mo re ov er, t h e
a dva nt a ge s of J ap an e s e p rodu ct i o n s ys t e ms i n i n t ern at i o n al

Ta bl e 1
Th e N e ga t i v e C on se qu enc e s o r Hi d d e n C os t s of Do w ns i zi n g
Experts Negative consequences or hidden costs
Carlson (2001) D e g r a d i n g o r d e s t r o yi n g a f i r m ’s m a r g i n s b y e m p l o ye e
d i s l o ya l t y, c o n t i n u o u s t u r n o v e r, t r a i n i n g a n d r e t r a i n i n g
costs, hiri ng and firing acti vities, l egal costs, theft,
and damage and sabotage of equipment.
Heritage & Davidson Tr a u m a t i c w o r k e r s , l o s s o f f o c u s , d e n i a l o f t h e e v e n t ,
(2001) and sense of helplessness.
Hickok (2002) Fear of losing jobs.
Padilla (1997) H i g h e r t u r n o v e r, d e m o r a l i z e d e m p l o ye e s , r i s k a v e r s e
b e h a v i o r t o a v o i d p e n a l t y, l o w e r j o b s a t i s f a c t i o n , a n d
fear of losing jobs.
Smallwood (2002) D i m i n i s h e d v a l u e s , d e m o r a l i z e d e m p l o ye e s ,
disappointments on the bottom line, trauma and fear of
l a yo f f s , l o s s o f t r u s t i n o r g a n i z a t i o n , a n g e r, a n x i e t y,
d e p r e s s i o n , s u r v i v o r ’s g u i l t , g r i e f , a l o s s o f t h e
p s yc h o l o g i c a l c o n t r a c t b e t w e e n e m p l o ye e s a n d t h e
c o m p a n y, d e c l i n e i n p r o d u c t i v i t y, l o s s o f t a l e n t ,
sacrificed teamwork and collaboration, lawsuits,
u nsch ed uled ab sen ces, theft, worse custo mer service,
r e c r u i t m e n t c o s t s , t r a i n i n g c o s t s f o r n e w e m p l o ye e s ,
a n d l o s i n g c o m p a n y’s r e p u t a t i o n b a s e d o n w o rd o f
mo u th b y d ismissed p eo p le.

c omp e t i t i ons a re d er i ve d fro m t h e c l os e c on ne ct i o n wi t h e ac h t e a m,
s ec t i on , or di v i s i on wi t h i n t he fi rms u nd e r t he l on g-t e r m c o m mi t m en t t o
t he c o mpa ni e s ( Abo , 19 95). It i s o bvi o us for J ap an es e l a b o r t ha t ha s
be e n wor ki n g fo r t h e fi r ms wi t h l i fet i m e c on t ra c t s th at dow ns i z i n g ha s
a se ri ou s i mpa ct on t h e e mpl o ye e s an d o t h er s t a keh ol d e rs . T he ref o re ,
t hi s s t ud y a ss um e s t h at t h e i mp le m en t at i o n of t h e c orp o rat e do wns i zi n g
l owe rs t h e o ve ral l c orpo rat e p rofi t a bi l i t y as t h e t ot a l res ul t s .
As for t h e e ffe c t s o f t he down si z i n g on t he se co nd d e pe nd e nt
va ri ab l e, Ap pe l b a u m et a l . (19 96 ) s a i d t h at t h e s t oc k p ri c e s we re n ot
ne c es s a ri l y i n cre as e d b y do wn s i z i n g. H owe ver, t h e st o c k pr i ce s ar e
us u al l y i nc re as e d b y t he i mpl e me nt a t i on of t he do wns i zi n g ( C ap pe l l i ,
19 99 ; Frah me , 20 02 ; Sa n Fra n c i sc o St at e Uni ve rsi t y, 1 998 ; Tue rk,
19 99 ). Ni s s an Mo t or C o., Lt d (20 02) re p o rt e d t h at t h e s t oc k p ri ce of t h e
c omp a n y i n cr e as e d a ft e r t h e i mpl e m e nt a t i on o f t he do wn si z i n g pl a n.
Th e d owns i zi n g i s c ons i de red t o a ffe c t t he st o c k pri c es of t h e fi r ms t h at
pe rfor m ed t he down si z i n g r e ga rdl e s s o f t he ac t ua l fi nan ci a l c ond i t i on s
of t h e fi r ms.
Su mma r y
In t hi s ch ap t er, t h e i n de pe nd ent v ari a bl e , t he de pe nd en t va ri a bl e s ,
a nd t h e e ffe c t s of t h e do wns i zi n g on t he de pe nd en t v a ri a bl e s are
rev i ew e d. B a se d o n t h e d efi n i t i ons t ha t a re s ho wn i n t h i s c h a pt e r, t he

t wo h yp ot he s es wi l l be t es t e d. Th e fol l o wi n g c ha pt e r ex pl a i ns t he
met h odo l o g y o f t h i s st u d y.

C ha pt e r Thr e e – Me t h od ol o g y
Ove r vi e w
T hi s ch ap t er e x pl a i ns t he res e arc h m et h o ds t o t es t t wo h ypo t he se s
s t at e d i n ch ap t e r on e. Fi rst , t h e p op ul a t i on o f t hi s s t ud y i s d e t er mi ne d.
Se co n d , sa mpl i n g m et ho ds a re s ho wn . T hi rd , me t ho ds for d a t a
c ol l e ct i on ar e de s cri be d. Fourt h , me t ho ds for d at a an al ysi s a re
a cc ou nt ed for. Fi n al l y, t h i s c h a pt e r i s s u m mari z ed .
S a mpl i n g b i as es mi gh t ha pp e n t h rou gh s et t i n g t h e d et e r mi n at i o n
of t h e i mpl e m en t at i on of t h e d owns i z in g b as e d on t he ce rt a i n
do w ns i z i ng r at i o whi c h i s de ri ve d f ro m t he for mul a : t he nu mb er of
e mp l o ye e s a t t + 1 di vi d ed b y t h e num b er of e mpl o ye e s at t . Th i s i s
be c au s e t he r e a r e d i ffe ren c e s bet w e en t he nu mb er o f t h e e m pl o ye e s
a nno un ce d b y t h e fi rms t o be re du ce d a nd t he nu mb er o f t h e e mpl o yee s
t ha t were ac t u a l l y d owns i z ed . Mor e ov er, i t i s mea ni n gful fo r t h e
res ea rc h e rs o f th e e ffec t s of t h e do wns i z i n g on t he co rpo ra t e fi n an ci a l
pe rfor m an ce s t o s t a y co ns i st e nt wi t h ot he r me t ho ds s uc h a s C a s ci o
(19 98). The re fore , t hi s s t ud y rel i e s on t h e a c tu al c ha n ge s i n t he numb e r
of t h e e mpl o ye e s t o de t e rmi ne wh e t he r t he fi rms ac co mpl i s he d t he
do wns i zi n g. B a se d o n C a sc i o (19 98 ), t hi s st u d y ad opt s t he 3 % r ul e (i .e .,
whe n t h e fi r ms s h o w mo r e t h an 3% d e c re as es i n t h e down si z i n g rat i o,
t hi s s t ud y a ss um e s t h at t h e fi r ms i mp l e men t e d t he do wn si z i n g).

Po pul a t i on
T he pop ul a t i on i s t h e fi r ms t h at h av e l a rge -c a pi t a l st o c ks
re gi s t ered wi t h t h e f i rs t di vi s i on of TS E. Mo st o f al l t h e fi r m s a re
maj o r J a pa n e se c o m pa ni e s i n t er ms of s al e s re v e nu es , t he s ca l e o f t h e
nu mbe r o f e mpl o ye e s , rep ut a t i on s, a nd s o fort h. The fl uct u at i o n o f t he
s t oc k p ri c es o f t h es e fi rms t en ds t o h av e a gr e at i mpa c t on t h e cha n ges
i n t h e p oi n t s o f TOP IX.
Sa mpl i ng Me t ho ds
At fi rs t , t he res ea r c h er n e e ds t o s e t co n di t i o ns i n t h e s c re e n i n g
s ys t e ms of Sh i ki h ou (2 000 , 20 02 ): s e t t l e men t t e rms i n M arc h of 1 997 ,
t he do wns i zi n g ra t i o (i .e. , mo re t h an 0% and l es s t ha n 9 7% ), t he
t hre e- ye a r av e ra ge n et profi t m argi n, a n d th e ra t es o f cha n g es i n st o ck
pri c es b as ed on t he cl o si n g p ri c e s fo r 3 ye a rs b e for e an d a ft e r t he
do wns i zi n g. Th en , s el e ct t h e l a rge -c a pi t al st o cks i n t he fi rst d i vi s i on of
TSE t o s ee t h e res ul t s . Th e s c re e ni n g s ys t ems sh ow t he n e c e s sa r y d at a
t o t e s t h ypot h es e s i n a s pre ad s hee t . Sh i ki h ou (2 00 0, 20 02 ) re qu i res
J ap an es e l a n gua ge t o s et sc re e ni n g c ond i t i ons o r ot he r op er a t i ons . In
t hi s re se ar c h, t h e fi r ms t h at h av e n o h i st o ri ca l da t a d ue t o s o me re as o ns
s uc h a s n ew fi r ms o r si mpl y un av ai l a bl e da t a a r e e x c l ud ed fro m t h e
s ampl e .
T he l eve l of c on fi de nce i s s et a s 5 % a c c ord i n g t o C a s c i o (19 98 ).

To pe rfo rm t h e s t a t i st i c al t t es t s and ch i -sq ua re t e st s , t h i s s t ud y u se s
St a t c e l de ve l op ed b y Yan ai (1 998 ). Thi s i s a u se ful s oft wa re t ha t i s an
ad d-i n pro gra m fo r Mi c ros o ft Ex c e l .
T hen , t he s a mpl e i s di vi d ed i nt o t wo s ub-s a mp l es t ha t a re a
pro fi t abl e do wns i zi n g gro up an d a no n - profi t a bl e do wn si z i n g gro up t o
kn ow t h e d i ff e ren ce s b et we en t h e t wo gro ups . Th i s i s b ec au se i t i s
i mport a nt fo r s t ra t e gi c p l ann ers o r t h e s t a ke hol d ers o f t h e fi rms t h at
i mpl e me nt t h e d o wn s i z i n g t o i nv es t i ga t e e a ch effec t o f t h e t wo di ffe re nt
do wns i zi n g t yp es , a s Luri e (2 00 2) po i nt e d o ut . Th e p ro fi t ab l e a nd
no n-pro fi t ab l e d o wn s i zi n g gro up s a re d e t e rmi n ed ba se d on t h e
t hre e- ye a r av er a ge n et p rofi t ma rgi n s b e fo re t he do wns i zi n g pe ri od (i .e .,
from t -2 t o t ). The f i rms t ha t ha v e t he p o si t i v e ra t i os are ca t e go ri z ed
i nt o t he pro fi t a bl e d o wns i zi n g s ub -s a mp l e. Th e c o mp a ni e s t ha t ha ve t he
ne ga t i ve r at i o s a re i n t he no n-pro fi t abl e do wns i zi n g s ub -s a mp l e. Wh e n
t he rat i o s of t he fi r ms a re e qu a l t o z e ro as t h e a ve ra ge ne t pro fi t
ma rgi ns ba se d o n t h e c al c ul a t i on rul es o f th e sc r ee ni n g s ys t ems i n
Sh i ki ho u (2 000 , 20 0 2), t h i s re s ea rch ex cl u de s t h es e fi r ms fr o m t h e
s ub -s a mp l es . Th e s c re en i n g s yst e ms ro u nd off t o fo ur d ec i ma l pl a ce s .
In ad di t i on , a non -d own si z i n g s a mpl e i s t a ke n fro m t h e p op u l at i o n
t o p rec i s el y ex a mi n e t he down si z i n g e ff e ct s ba s ed on t h e a v e ra ge n et
pro fi t ma rgi ns fo r s up pl e me nt a l s t at i s t i ca l t e st s . Th i s re s ea rc h as su mes

t ha t t he fi r ms d i dn’t c arr y out t h e d owns i z i n g wh en t he co mp an i es ha d
t he do wns i zi n g ra t i o s of gre at e r t ha n – 3 % an d l e ss t ha n 3 %. T he
no n-do wns i zi n g s a m pl e i s di v i de d i nt o t wo s ub -s a mp l es a s t h e
no n-do wns i zi n g p ro fi t ab l e fi r ms a nd t h e no n-do wn si z i n g an d
no n-pro fi t ab l e fi r ms i n co mmon wi t h t he s ub -s a mp l es i n d ow ns i z i n g
fi rms a s p rev i ous l y st a t ed . The fi rms t h at h av e t h e d o wns i zi n g r a t i os of
mor e t ha n 3% are c o ns i de red as up s i zi n g fi rms (i .e ., t he wo r kfo rc e of
t he fi r ms a r e i n cr ea s ed ). As t h e p urpo s e o f t h i s re s ea rch i s c on ce rn e d, i t
i s no t ne ce ss a r y t o d i sc us s t he effe ct s of t h e u ps i zi n g i n d e t a i l .
M et ho ds f or Dat a C ol l e ct i o n
T hi s st u d y co l l e c t s t h e d at a on ea c h fi r m from Sh i ki h ou (2 00 0 ,
20 02 ) an d t he ye arl y da t a o n TOP IX fro m T SE (2 00 2b ). S hi ki h ou (200 0,
20 02 ) ar e t he C D-R OMs t ha t i nc l ud e t h e d et a i l ed J ap ane s e c orp or at e
fi na nc i al d at a an d t h e u se ful s c re e ni n g s ys t e ms. Th rou gh t he sc r ee ni n g
s t ep s t h at a re e x p l ai n ed i n t h e p re c ed in g p art i n t hi s ch ap t er, t h e
req ui re d d a t a t o t e st t wo h yp ot h es es o f t h i s re s ea rch i s o bt a i ne d. TS E
(20 02b ) i s an onl i n e d at a s ourc e i n t he f orm o f Mi c ros oft Ex ce l for m at .
Th es e d at a s ourc es a re r e l i abl e , a s m a n y Ja p a ne s e i nv es t ors t rus t t he
i nfo rma t i on . In a ddi t i o n, Mi cros oft Wi n do ws o pe rat i o n s ys t ems i n
J ap an es e v ers i on s s u ch as Wi n do ws 95 , 98 , 20 00 , an d s o for t h are
req ui re d for t h e a c c es s t o S hi ki h ou (200 0, 2 002 ).

M et ho ds f or Dat a A na l ys i s
To e x a mi n e t h e fi rs t h ypot h es i s ba s e d o n o ne -t a i l e d (up p e r) p ai re d
t t e st , t h e t h ree - ye a r a ve ra ge ne t p ro fi t ma rgi ns b efo re an d a ft er t h e
do wns i zi n g (i .e ., t h e t hre e - ye ar d at a be fore t he do wn si z i n g ac co rdi n g t o
t he a nnu al r e po rt s d at e d fro m t t o t -2 an d t h e t h re e - yea r da t a a ft e r t h e
do wns i zi n g b as ed o n t he an nua l r ep ort s da t ed fro m t + 1 t o t + 3) a re
s t at i s t i ca l l y a n a l yz e d . Th e fi rs t nul l h yp ot he s i s fo r t he fi rs t h ypo t he si s
of t h i s re s ea rch i s t h at t h ere i s n o d i ffe ren c e be t we e n t h e t wo da t a
be for e an d a fte r t h e do wns i zi n g. Th e fi rs t al t e rna t i ve h yp ot h es i s i s t h at
t he a ve ra ge n e t pro fi t ma rgi ns b efor e t h e do wn s iz i n g ar e be t t er t h an t he
on es a ft e r t he do wn s i zi n g. If t he fi rst n ul l h ypo t he si s i s s i gni fi c an t l y
rej e c t ed and t he fi rs t a l t ern at i v e h ypo t h e si s i s a dop t ed , t he fi rs t
h ypo t he si s of t h i s r e s ea rc h i s s i gn i fi c a nt l y su ppo rt ed . The av era ge ne t
pro fi t ma rgi ns b e for e an d a ft er t h e d own s i zi n g i n su b-s a mpl e s are
i nv es t i ga t e d i nt o t he t t es t s ba s ed on t h e fi rs t h ypo t h es i s of t h i s
res ea rc h.
As for t h e s e c on d h yp o t he si s , t h e ra t es of t h e c ha n ges i n t h e s t oc k
pri c es b as ed on e a c h cl o si n g p ri c e i n t h e s a mpl e i s co mp a re d wi t h t h e
rat e s of t h e c ha n ge s i n t he p oi nt s of TOP IX b as e d on t he cl o si n g p oi n t s.
Th ro u gh c he c kin g w h et he r t he rat e s o f t he c ha n ge s i n t he s t oc k p ri c e s
ou t pe rfo r m t h e o n e s of t he ch a n ge s i n t h e po i nt s of TO P IX o r n ot , t h i s

s t ud y de v e l op s 2 x 2 co nt i n ge nc y t ab l es t o pe rfo r m t h e c hi -s qua re fo r
i nd ep en de n c e t e st s . Th e s e co nd nul l h yp ot he s i s fo r t he se co nd
h ypo t he si s of t h i s r e s ea rc h i s t h at t h ere i s n o re l at i o ns hi p be t we en t he
i mpl e me nt a t i on of t he do wns i zi n g a nd t h e ra t es o f t h e c h a n ges i n t he
s t oc k p ri c es . Th e s e co nd al t e rn at i v e h yp ot he s i s i s t h at t h ere i s a
s i gn i fi c an t rel a t i on s h i p b et wee n t h e i mp l emen t at i o n of t h e d owns i z i n g
a nd t h e ra t es o f t h e c ha n ges i n t he st o c k pri ce s of t h e fi r ms t h at a re
do wns i ze d. If t h e s e c on d n ul l h ypo t h e si s i s si gni fi c an t l y r ej e c t ed and
t he s ec on d a l t erna t i ve h yp o t he si s i s ad o pt e d, t he se co nd h yp ot h es i s of
t hi s re se ar c h i s s i gn i fi c an t l y s up po rt e d. T he da t a i n t wo s ub- s a mp l es i s
s t at i s t i ca l l y t e s t ed b y t he ch i -s qu a re t es t s i n t h e s a me wa y as t he
e x a mi n at i o n i nt o t he s ampl e b a se d o n t h e s e con d h yp ot h e s i s o f t hi s
res ea rc h.
Ad di t i on al l y, t h e no n-do wns i zi n g s a mp l e a nd su b-s ampl e s a re
t e st e d i n co mmon w i t h t he i nv es t i gat i on i nt o t he fi rs t h ypo t he si s o f t hi s
res ea rc h. Th en , t he av er a ge ne t p rofi t m argi ns be fo re t he do wn si z i n g
pe ri od s i n t he pro fi t a bl e fi r ms i n s u b-sa mpl e s a re t e s t ed b y t h e
s t ud ent ’s t t e s t wi t h on e-t a i l (l o we r). In t h i s wa y, e a ch av er a ge n e t
pro fi t ma rgi n be fo re a nd aft e r t h e d owns i z i n g p e ri o ds i n e a c h
s ub -s a mp l e a r e s t a t i st i c al l y t es t e d. Th e n ul l h ypo t he se s i n t he t e st s a re
t ha t t he re i s n o di ff e ren ce be t we e n t h e t wo ra t i os . The a l t er na t i ve

h ypo t he s e s i n t he t e st s a re t ha t t he r e i s a s i gni fi c an t di ffer e nc e b et w e en
t he t wo ra t i os . The do wns i zi n g gro up s c an be c ons i d e red i n t h e we a k
po s i ti o ns i n t e rms o f t he ove r al l p rofi t a b i l i t y i n co mp ari s on wi t h t he
pro fi t abi l i t y of t h e n on-d owns i zi n g fi r ms. Thi s i s be c a us e t h e
do wns i zi n g d ec re a s e s t he co mp et i t i ve d i sa dv an t a ge s o f t he f i rms .
Ad di t i on al C omme nt s on Ja pan es e Ban ks
C o ns eq ue nt l y, t he s ampl e ba se d o n t h e d owns i z i n g fi r ms d o e s n’t
i nc l ud e a n y J ap a ne s e b an ks i n t h i s re se a rc h. Thi s i s bec a us e t h e
J ap an es e gov ern me n t h ad su ppo rt ed t he ba nks t o av oi d fi n an ci a l cri s es
(e. g., z ero i nt er e s t ra t e offer e d b y J ap an es e c e nt ral b an k, re l i ef fun d fo r
t he ba n ks, an d s o fo rt h ), ev en t hou gh t h e ba n ks h ad l arge ba d d eb t s
du ri n g t he t i me fra me o f t hi s res e a rch ( “Ni ho n Ke i za i ,” 2 0 0 1). Th e
ba nks we r e n ot a s ke d t o t a ke res po ns i bi l i t y of t he fi na nc i al p robl e ms b y
t he go v e rn men t ( “K en ze n kou De mo,” 2 00 2). Tsu da (199 9 ) a l so st a t e d
t ha t J ap an es e b an ks ha d b ee n p rot e ct e d b y t he go v e rn men t b a se d o n
a dmi ni s t rat i v e gui d a nc e.
Su mma r y
In t hi s ch ap t er, t h e d et a i l ed res e a rc h me t h ods a re e x pl a i ne d. The
res ea rc h res u l t s a nd fi ndi n gs wi l l be sh own i n t he fol l o wi n g c h a pt e r.

C ha pt e r Fou r - An al ys is
Int rod uc t i on
In t hi s ch ap t er, t h e r e su l t s of t he s t at i s t i ca l t e st s t o e x a mi ne t he
h ypo t he s e s ar e sh ow n. At fi rs t , t he c ons e que nc es o f t h e t e s t s fo r t he
s ampl e a re pre s e nt e d. S e c on d, t h e r e su l t s o f t he ex ami na t i o n s i n t o t h e
t wo s ub -sa m pl e s (i . e ., t he do wns i zi n g b y pro fi t a bl e fi r ms a nd b y
un profi t a bl e fi r ms ) are s hown . Thi rd, t h e su ppl e m en t al s t at i s t i c al
res u l t s re l at e d t o t h e non -do wn si z i n g s a mpl e an d s ub -sa mp l es a r e
pre s ent e d. The n, t h e re su l t s a re i n t e rp re t e d.
Su mma r y o f St at i s t ic al Tes t s
Fi rst , t h e r e su l t s of t he pa i red on e -t ai l e d (u ppe r) t t es t a nd t he
c hi -s qua r e fo r i nd e p e nd en c e t es t wi t h a 2 x 2 c on t i nge nc y t a bl e for t he
s ampl e i n 9 5 % co nfi de nc e a re re po rt ed. As fo r t h e di ffer e nc es i n t h e
e ff e ct s o f down si z i ng on t h e a ve ra ge n et p rofi t m argi n s be fo re a nd aft e r
t he do wns i zi n g b as e d on t he t t es t , t he n ul l h ypo t he si s i s si gni fi c an t l y
rej e c t ed (Tab l e 2 ). Acc ordi n g t o t he di ffere n c es i n t h e e ffec t s of
do wns i zi n g o n t h e r at e s of t he c ha n ge s i n t he s t oc k p ri c e s, t h e n ul l
h ypo t he si s w as s i gn i fi c a nt l y re j e c t ed ( Ta bl e 3).
S ec on d, ba s ed on t h e av e ra ge n et profi t ma rgi ns , t he s a mpl e i s
di v i de d i n t o t wo s ub -sa mpl e s: t h e d owns i zi n g group s b a se d o n t he
pro fi t abl e fi r ms a nd t he non -profi t a bl e f irms . In t h e d owns i z i n g

Ta bl e 2: Do w ns i zi n g Fi r ms (Tot a l : Ne t P rof i t M arg i ns )
N M SD
B e f o r e D o w n si z i n g 123 0.0127 0 .0 3 2 9
After Downsizing 123 0.0023 0 .0 4 2 5
t 3 .6 5 6 6
t Critical 1 .6 5 7 4
P One-tail .0 0 0 2
L e v e l of c on f i de n c e .0 5
Ta bl e 3: Do w ns i zi n g Fi r ms (Tot a l : St oc k Pri c e Ch an ge s)
O b se r v a t i on
O u t pe r f or m T O P I X B e l o w T OP I X T ot a l
B e f o r e D o w n si z i n g 24 99 123
A f t e r D o w n si z i n g 48 75 123
T ot a l 72 174 246
C h a n ge Ra te s of T O P I X
R a t e o f C h a n ge s
B e f o r e D o w n si z i n g - 0 .2 5 5 2
A f t e r D o w n si z i n g 0 .1 8 0 9
R e su l t s of C h i - s qu a re T e st
χ2 11.3103
Ｐ One-tail .0008
χ 2 C ri t i c al 3 .8 4 1 5
Le v e l of C on f i de n c e .0 5

gro up b a se d o n t h e pro fi t abl e fi r ms , t h e n ul l h ypo t he si s i s s i gni fi c an t l y
rej e c t ed bas e d o n t he t t e st fo r t he av er a ge n et p rofi t ma rgi n s be fo re
a nd a ft e r t h e d owns i z i n g (Tab le 4 ). As f or t h e e ffe c t s o n t h e s t oc k p ri ce
c ha n ge s , t h e nu l l h yp ot h es i s i s s i gn i fi ca nt l y re j e ct e d b a s ed on t he
c hi -s qua r e t e s t (Tab l e 5 ).
In t h e do wn si z i n g grou p b as e d on t he n o n-pro fi t a bl e fi r ms , t he
nu l l h ypot h es i s i s si gni fi ca nt l y rej e ct e d b as e d on t he t t e st f o r t h e
a ve ra ge ne t p ro fi t m a rgi ns b efo re an d a f t er t he do wns i zi n g ( Ta bl e 6).
As fo r t he eff e ct s o n t he st o ck pri c e c h a n ges , t he nu l l h ypo t h es i s i s
s i gn i fi c an t l y re j e c t e d ba se d o n t h e c hi -s qu are t es t wi t h t h e f i s he r ’s P
du e t o t he ex i s t enc e of t he c el l t h at h as t he ex pe ct e d fr e que nc y o f l es s
t ha n fi v e (Ta bl e 7).
T hi rd, t h e s up pl e me nt a l s t at i s t i ca l res ul t s d eri ve d fro m t h e d at a of
t he no n-do wns i zi n g fi rms a re re po rt e d. As for t h e d i ffe r en c e s be fo r e
a nd a ft e r t h e d owns i z i n g p eri o ds ba s e d o n t h e p ai re d t t e st , t h e nul l
h ypo t he si s i s si gni fi c an t l y rej e c t ed (Tab l e 8 ). The st a t i s t i ca l res ul t s of
t he da t a ba s e d o n t h e n on-d owns i zi n g p ro fi t ab l e fi r ms s ho w t ha t t he
nu l l h ypot h es i s i s si gni fi c a nt l y rej e ct e d a cc o rd i n g t o t h e t t e st , a s Ta bl e
9 s h ows. Ho wev e r, t h e n on-d owns i z i n g group b a s ed on t h e
no n-do wns i zi n g a nd non -profi t a bl e fi rm s ha s d i ffe re nt r es u lt s . Th e n ul l
h ypo t he si s i s si gni fi c an t l y a c c ep t ed b a se d o n t h e t t e st (S ee Ta bl e 10 ).

Ta bl e 4: Do w ns i zi n g b y Prof i t a bl e Fi r ms (N e t Pro f i t Ma rgi ns )
N M SD
B e f o r e D o w n si z i n g 104 0.0199 0 .0 2 6 5
After Downsizing 104 0.0078 0 .0 3 8 3
t 4 .7 3 1 1
P One-tail 3 .6 7 2 4 E - 0 6
Ta bl e 5: Do w ns i zi n g b y Prof i t a bl e Fi r ms (Sto ck Pr i ce C ha ng es )
O b se r v a t i on
O u tp e r f o r m T O P I X B e l ow T OP I X Total
After Downsizing 39 65 104
T ot a l 62 146 208
R a t e of C h a n g e s
B e f o r e D o w n si z i n g -0.2552
After Downsizing 0.1809
χ2 5.8825
Ｐ One-tail .0153
χ 2 C ri t i c al 3.8415

Ta bl e 6: Do w ns i zi n g b y N o n-prof i t a bl e F i r ms (N et Pro f i t Ma rgi ns )
N M SD
B e f o r e D o w n si z i n g 17 -0.0298 0 .0 3 8 2
After Downsizing 17 -0.0316 0 .0 5 3 6
t 0 .1 3 1 0
P One-tail .4 4 8 7
Ta bl e 7: Do w ns i zi n g b y N o n-prof i t a bl e F i r ms (St o ck Pr i ce C ha nge s )

O b se r v a t i on
O u tp e r f o r m T O P I X B e l ow T OP I X Total
After Downsizing 8 9 17
T ot a l 9 25 34
R a t e s o f C h a n ge
B e f o r e D o w n si z i n g -0.2552
After Downsizing 0.1809
χ2 7.4044
Fi s h e r ’ s P .0083

Ta bl e 8: N o n-Dow n s i z i ng Fi r ms (To t al : N e t Prof i t M argi n s)
N M SD
B e f or e D ow n si z i n g Pe ri od 199 0.0265 0 .0 3 3 4
A f t e r D ow n s i zi n g P e ri od 199 0.0163 0 .0 4 5 2
t 4 .3 5 8 6
P One-tail 1 .0 7 E - 0 5
Ta bl e 9: N o n-Dow n s i z i ng Prof i t ab l e F i rms (N et Prof i t Marg i ns )
N M SD
B e f or e D ow n si z i n g Pe ri od 183 0.0308 0 .0 2 9 1
A f t e r D ow n s i zi n g P e ri od 183 0.0193 0 .0 4 4 1
t 5 .0 6 6 4
P One-tail 4 .6 9 E - 0 7

Ta bl e 10 : N on-Do w n s i zi n g a nd N o n-Prof i t a bl e Fi rms (N et P ro f i t
M argi n s)
N M SD
B e f or e D ow n si z i n g Pe ri od 16 -0.0231 0 .0 3 9 9
A f t e r D ow n s i zi n g P e ri od 16 -0.0185 0 .0 4 4 7
t - 0 .3 5 0 3
P One-tail .6 3 4 5

To c on si d er t he di ff e ren ce s b et w e en t h e su b-s ampl e s ba se d o n t h e
do wns i zi n g fi r ms a n d t he su b- gro ups b a s ed on t he no n-do wn si z i n g
fi rms , e ac h a ve ra ge n et p ro fi t ma rgi n i n e ac h s ub -sa mpl e i s t e s t ed b y
t he s t ud ent ’s t t e s t s. Ac co rdi n g t o t h e s t a t i st i c al re s ul t s ba se d o n t h e
do wns i zi n g a nd t he non -down si z i n g pro fi t a bl e fi rms , e a c h a vera ge ne t
pro fi t ma rgi n be fo re t h e d owns i zi n g p eri od ha s a s i gn i fi ca nt d i ffe r en c e
ba s ed on t he t t es t ( Ta bl e 11 ). Eac h a ve ra ge ne t pro fi t ma rgi n aft e r t h e
do wns i zi n g p eri od h a s a l s o a s i gni fi c an t di ffer e nc e b as e d on t he t t es t
(Ta bl e 12 ). Ho wev e r, t he s t at i s t i c al re su l t s o f bot h no n-pro fi t a bl e
s ub -s a mp l es s ho w t h ere i s no d i ffer en c e be t we e n t h e a v e r a ge n et p rofi t
ma rgi ns ac co rdi n g t o Tab l e 1 3 a nd Tab l e 1 4.

Ta bl e 11 : Prof i t a bl e F i rms (Bef o re Dow n si z i ng Pe ri o d: N e t Pro f i t
M argi n s)
N M SD
D o w n s i z i n g Fi rm s 104 0.0199 0 .0 2 6 5
N o n - do w n s i z i n g Fi rms 183 0.0308 0 .0 2 9 1
t - 3 .1 4 7 9
t Critical - 1 .6 5 0 2
P O n e - t ai l ( Low e r ) .0 0 0 9
Ta bl e 12 : Prof i t ab l e F i rms (Af t er Dow n si z i ng Pe ri o d: N et P ro f i t
M argi n s)
N M SD
D o w n s i z i n g Fi rm s 104 0.0078 0 .0 3 8 3
N o n - do w n s i z i n g Fi rms 183 0.0193 0 .0 4 4 1
t - 2 .2 2 5 2
t Critical - 1 .6 5 0 2
P O n e - t ai l ( Low e r ) .0 1 3 4

Ta bl e 13 : N on-Pro f i t abl e Fi r ms (Be f ore Do w ns i z i ng P er i od : Ne t Prof i t
M argi n s)
N M SD
D o w n s i z i n g Fi rm s 17 -0.0298 0 .0 3 8 2
N o n - do w n s i z i n g Fi rms 16 -0.0231 0 .0 3 9 9
t - 0 .4 8 9 6
t Critical - 1 .6 9 5 5
P O n e - t ai l ( Low e r ) .3 1 3 9
Ta bl e 14 : N on-Pro f i t abl e Fi r ms (Af t e r Do w ns i z i ng Pe r i od : N e t Prof i t
M argi n s)
N M SD
D o w n s i z i n g Fi rm s 17 -0.0316 0 .0 5 3 6
N o n - do w n s i z i n g Fi rms 16 -0.0185 0 .0 4 4 7
t - 0 .7 5 5 6
t Critical - 1 .6 9 5 5
P O n e - t ai l ( Low e r ) .2 2 7 8

Int e r pret a t i on of Re su l t s
In t h e t t es t s , t he nu l l h yp ot h es es a re re j ec t ed wh en t he t va l ue i s
gr e at e r t ha n t h e c ri t i ca l t va l ue (.95 ) i n t erms o f a bs ol ut e v a l ue s , an d
when t h e p rov a bi l i t y i n t h e t t e st s i s l e s s t ha n t h e l e ve l of c on fi d en ce
(5% ). In t h e c hi -s qu a re t e s t s, t h e n ul l h ypo t he s es ar e rej e ct e d wh en t he
χ 2 va l ue i s gre a t er t h an t he cri t i c al χ 2 v al u e (.9 5) b a s ed o n t he
a bs ol ut e va l ue s , an d whe n t h e p rov a bi l i t y i n t h e c hi -s qu ar e t es t s or
Fi s h e r ’s P ar e l es s t ha n t he l e ve l o f co n fi de nc e (5 %).
T he fi rs t h ypo t he si s of t h i s re se a rc h (i .e ., a ft e r t h e do wns i zi n g,
t he a ve ra ge n e t pro fi t ma rgi ns o f J a pa n e se fi r ms be c a me wo rs e t ha n t he
on es b efor e t he do wn s iz i n g) i s su ppo rt e d be si d es t he c as e o f t he
s ub -s a mp l e b as e d o n t he do wn s i zi n g fi r ms wi t h t h e n e ga t i v e a ve ra ge n et
pro fi t ma rgi ns . As t he s up pl em e nt a l st a t i s t i ca l res ul t s s how, t he da t a o f
t he no n-do wns i zi n g fi rms a s a who l e s h o ws t h at , be fo r e t h e d owns i zi n g
pe ri od , t he fi rms h a ve be t t er fi na nc i al perfo rm a nc es t h a n t h e o ne s a ft er
t he do wns i zi n g p eri od . The a v e ra ge ne t pro fi t m a rgi ns o f t h e
no n-do wns i zi n g fi r ms wi t h t he pos i t i ve a ve ra ge ne t p ro fi t ma rgi ns
be for e t he do wn si z i n g pe ri od h av e t h e b et t e r fi na n c i al p e rfo rm an ce s
t ha n t h e o ne s a ft e r t h e d owns i z i n g peri o d. Th e a v e ra ge n et p rofi t
ma rgi ns of t he no n - do wns i zi n g fi r ms wi t h t h e n e gat i v e a ve r a ge n et
pro fi t ma rgi ns b e for e an d a ft er t h e d own s i zi n g p e ri od s ha ve no

di ffe r en c e a c co rdi n g t o t h e s t a t is t i c al t e s t . Addi t i o na l l y, as Ta bl e 11 t o
Ta bl e 14 r ev ea l , t h e av er a ge ne t p rofi t m argi ns be fo re and a ft e r t he
do wns i zi n g i n t he p r ofi t a bl e an d t he no n -pro fi t ab l e d o wns i zi n g fi rms
ne ve r ou t pe rfo r m t h e o ne s b e fo re a nd a f t er t h e d owns i z i n g p eri o ds i n
t he no n-do wns i zi n g fi rms.
T here fore , i n t he do wns i zi n g fi r ms wi t h t he pos i t i ve a ve ra ge ne t
pro fi t ma rgi ns , t h e d owns i z i n g m a y c au se mo re s e rio us ne ga t i ve e ffe ct s
on t he co rpo ra t e fi n an ci a l pe rfo r ma nc es t h an t he e ffe c t s of t he
i nc rea s es i n t h e e ffi ci e nc y o r th e p ot e nt i a l prod uc t i vi t y d e ri v ed fro m
t he wor kfo r ce red u c t i o n. In t he do wn si z i n g fi rms wi t h t h e n e gat i ve
a ve ra ge pro fi t m a rgi ns , t h e h i dde n c os t s of t he d owns i zi n g m a y b e
offs et b y t h e b en e fi t s of t h e wor kfo rc e r ed uc t i on, but fu rt h e r re se a rc he s
mus t l oo k c a re fu l l y i n t o t hi s p oi nt .
T he se co nd h yp ot h e s i s (i .e ., a ft e r t he d o wns i zi n g, t h e ra t es of t h e
c ha n ge s i n t h e s t o c k p ri c es o f t h e Ja pa n e se fi r ms t h at i mpl e me nt e d t h e
do wns i zi n g o ut p e rfo rm t he ra t e -o f-c ha n g e i n t he po i nt s of t he J ap an es e
s t ock p ri c e i nde x ) i s s upp ort e d b y t he r e s ul t s o f a l l c hi -s qua re t e s t s.
Th e s t oc k c h a n ge r a t es of t h e fi r ms t h at a do pt e d do wns i zi n g o ut pe rfor m
t he rat e o f t h e c h a n ge i n t h e po i nt s of t he s t oc k p ri c e in de x .
Downs i z i n g arou s e s t he ex pe ct a t i on of t he i nv es t ors , who t h i nk t he
c omp a ni e s t h at a do p t e d t he do wns i zi n g wi l l a chi e ve c orpo ra t e growt h

or re st o r e c orp o rat e fi na nc i al h ea l t h t h ro u gh do wns i zi n g. Ev en t ho u gh
t he a ve ra ge n e t pro fi t ma rgi ns a re d ec re a se d, t h e c ha n ge ra t es of t h e
s t oc k p ri c es o f t h e d own si z i n g fi r ms ou t perfo rm t h e o ne of t he ch an ge
i n t h e p oi n t s o f t he st o ck p ri c e i n de x .
Su mma r y
Do wn s i zi n g do es n’t s i gn i fi c a nt l y i mp ro v e t he av era ge ne t pr ofi t
ma rgi ns i n a n y c a se . Howe ve r, t he ra t e s o f ch an ge s i n t he st o ck p ri c es
ou t pe rfo r m t h e o n e of t h e c ha n ge i n t he poi n t s o f t he st o ck pri c e i n de x
a ft e r do wn s i zi n g i n e ve r y c as e . Downs i z i n g a rous e s t h e e x p ec t at i o n o f
t he i nv es t ors who as s umes t ha t t he do wn s i zi n g c an bri n g t he fi na nc i al
he a l t h t o t h e fi r ms t hat i mp l e men t ed do wn si z i n g. In t h e fol l o wi n g
c ha pt er, t h e co n cl u s i ons of t h i s re s ea rch , rec o m me nd at i o ns , di s cu s si o n
on t he wor k s h a ri n g i n J ap an , a nd fu t u re re s e a rch n ee ds wi l l be
pre s ent e d.

C on cl u si o ns
C on cl u si o ns
T hi s res ea rch i s t o t es t t h e t wo h yp ot he s es on t he e ffe ct s of
do wns i zi n g o n t h e c orpo ra t e fi n an ci a l pe rfor ma nc e s i n J a pa n. The fi rs t
h ypo t he si s i s t ha t Ja pa ne s e fi rms a ch i ev e b et t e r fi na nc i al p e rfor man ce s
be for e t he do wn si z i n g t ha n t h e p er for m an ce s aft e r t h e d ow ns i z i n g i n
t e rms o f t h e t h re e - yea r av er a ge n e t prof i t margi ns . The s e c o n d
h ypo t he si s i s t ha t t h e rat e s o f ch an ge s i n t he s t ock pri c es o f t h e fi r ms
t ha t i mpl e me nt e d t h e d owns i z in g o ut p er form t h e rat e of t he c ha n ge i n
t he po i nt s of t h e J a p an es e st o c k p ri c e i n de x a ft e r t he do wns i zi n g.
T he prev i ou s r e se ar c he s on t h e e ff ec t s of do wn s i zi n g i n Ame ri c a
a nd J a pa n w er e rev i ewe d i n ch apt e r t wo t o co ns i de r t he app rop ri a t en es s
of t h e h yp ot he s es . T he l i t e ra t ur e an d t h e o pi ni o ns of t h e e x p ert s on t he
do wns i zi n g s t ud y s h o we d t h e i mpo rt an c e of t h is s t ud y. C h a p t er t h re e
e x pl a i ne d t h e me t ho d ol o g y o f t hi s r es e a rch . Th i s s t ud y a ss u me s t ha t t h e
fi rms i mpl e me nt e d d owns i z i n g wh en t h e co mp an i es red uc e d t he
wor kfo r ce b y mo r e t ha n 3% in a fi s c al yea r. The s t at i s t i ca l r es u l t s we re
a na l yz e d i n c hap t er fo ur, ba s ed on t he t t es t s an d t he c hi -s q ua re t e s t s.
Th e fi rs t h yp ot h es i s of t hi s res e a rc h i s s upp ort ed i n t h e s a mp l e a nd t he
s ub -s a mp l e (t h e p ro fi t ab l e fi r ms t h at i m pl e me nt e d t h e d own s i z i n g). In
t he ot h er s ub -sa mpl e (t h e n on -p rofi t ab l e fi r ms t ha t c a rri e d o ut t h e

do wns i zi n g), t he h ypo t he si s i s no t su pp ort ed bu t i t i s s a fe t o sa y t h at
t he ov era l l pro fi t a bi l i t y of t he fi rms i s n o t si gni fi c an t l y i mp rov ed b y
do wns i zi n g. Th e s e c o nd h yp ot he s i s o f t h i s res e a rch i s su pp o rt ed i n t h e
s ampl e a nd t h e t wo su b-s ampl e s .
T hi s res ea rch co nc l ude s t ha t do wn si z i n g ma y re du c e t he ov era l l
pro fi t abi l i t y of t h e f i rms t h at i mpl e men t e d t he orga ni z at i o na l ch an ge
pl a ns whe n t h e fi rm s a re pro fi t a bl e. Thi s i nd i ca t es t ha t t he hi d de n c os t s
of d owns i z i n g o ut w e i gh t h e b en e fi t s fro m t he wo r kfor c e r e d u ct i o n.
Howe ve r, wh en t h e fi rms a re no t p rofi t a bl e , t he hi d de n c os t s of
do wns i zi n g m a y be offs et b y t h e b ene fi t s of do wns i zi n g.
Do wn s i zi n g at t ra ct s t h e i n ve st o rs re ga rd l es s of t he a ct u al
pro fi t abi l i t y of t h e c orpo rat i o ns . The i m pl e me nt a t i on of do wn s i zi n g
a ro us es t h e e x p ec t at i o n of t h e i n ve st o rs a nd ma ke s t he st o c k pri c e
pe rfor m an ce s o f t he fi rms ou t p e rfo rm t h e re t urn o f t he st o c k pri c e
i nd ex . In t h e mat t e r of c orpo r at e go v e rn an ce , t h e res ul t s i m pl y t ha t
J ap an es e c o mp ani e s ca n get i n t o d an ge r i n t erms of t he l on g-t e rm
gro wt h i f t he t op ma na ge me nt o f t h e fi rms t hi n ks l i t t l e o f t he ne ga t i ve
e ff e ct s o f down si z i ng an d i s ea s i l y s wa ye d b y t h e t h ou ght o f t he wea l t h
of t h e s ha r eh ol d ers .
Re co mm e nd at i on s
Fo r t he t op man a ge r s i n J ap an es e c orp or at i o ns , t he e ffe ct s o f

do wns i zi n g o n c orp o ra t e fi n an ci a l p e rfo rma nc e s a re c ur re nt l y c ri t i ca l
i s su es u nde r t he s e ri ou s re c e s si o n. Th e ma n a ge rs s ho ul d c a re ful l y
a ss e ss t he ne ed s of t he organ i za t i ona l c h a n ge s i n o rd e r t o re gai n
pro fi t abi l i t y. Fr o m t h e a s pe ct s of J ap an e s e cu l t ure, t h e wo r k mot i va t i on
of J a pa n es e bu si n es s pe rs o ns t en ds t o b e re l at e d t o h a rmo ni o u s h uman
rel a t i on sh i p, wi t h t he se ns e of co l l ec t i ve ob l i ga t i on (Ho fs t e d e , 19 91;
Tromp en a a rs & H a m pd en -Turne r, 19 98 ). Mor e ov er, Horn es t a y (19 96 )
po i nt e d o ut t ha t i t was d i ffi c ul t t o fi nd o ut wh at s i ze t he r i g h t -s i z i ng
was . It i s ap prop ri at e t o a vo i d i mpl e me n t i n g t h e d owns i zi n g i n t erms of
t he c orpo ra t e pro fi t a bi l i t y as l on g a s t h e fi r ms c a n a voi d i t . As La z ea r
(19 98) a rgu ed , t he t op ma n a ge rs s ho ul d ca r eful l y co ns i de r t he
organ i z a t i on al c ha n ge p l a ns t o ba l an ce be t we e n t h e t ot a l c o s t s a nd
be ne fi t s of t he i mpl em e nt a t i on o f t he o rga ni z at i o na l ch an ge s.
Ho we ve r, t he man a g ers sh ou l d pa y a t t e n t i on t o t h e me nt al h ea l t h
of t h e e mpl o ye e s i f t h e fi r ms ca n ’t a voi d ad op t i n g t h e d o wn s i z i n g.
Acc ord i n g t o Se n a n d Far z i n (20 00 ), t h e t op ma n a ge me nt s h o ul d
c ons i de r i nn ov at i on pro ce ss , i n st i t u t i ona l de ve l op me nt b as e d on
e co no mi c an d s o c i o po l i t i ca l rat i o na l i t y, a nd co mp en s a t i on s ys t e ms
whe n t h e fi r ms e x e cu t e t h e p l an ne d c ha n ges . As Ta ma ri (2 0 0 2) ad vi s e d,
t he fi r ms s ho ul d a s s i s t t h e work ers who a re a ff ec t e d b y t he do wn si z i n g
for t h e s uc ce s sfu l i mp l e men t at i o n o f orga ni z at i o na l ch an ge s. P ad i l l a

(19 97) s u g ge st e d t e n s t e ps for su c c e ss f ul i mpl e me nt a t i on o f do wns i zi n g.
Sm a ll wo od (2 00 2) a l s o sh owed fou rt e e n t i ps t o mi n i mi z e t h e n e gat i v e
e ff e ct s o f down si z i ng. Mol l e r (19 99) r e v i e we d t h e l i t e r at u re o n t he
s urvi v or s yn d ro me d eri v ed f ro m down si z i n g an d c onc l ud e d t ha t op en
c om mu ni c at i o ns be t we e n t he t op man a ge m en t an d t he e mp l o ye e s we re
t he mos t i m port a nt c ompo n e nt of d owns i z in g t o r ee n e rgi z e t h e
s urvi v ors . In a dd i ti o n t o t he op en co mm un i ca t i on , Wa l t e rs ( 200 1)
a rgue d t h at i n sp i red l ea de rsh i p w as c ri t i ca l for t h e fi r ms t o r e du ce t h e
hi d de n c os t s of do w ns i zi n g.
Fu rt he rmo re, t h e fi r ms s ho ul d av oi d off eri n g ea rl y re t i r e me n t t o
red uc e t h e wo rk for c e . Ac co rd i n g t o O ku ch i (200 1), J ap an es e
c orpo ra t i on s t en ded t o o ffer e a rl y re t i r e men t pl a ns t o t h e e mpl o ye e s . As
C ho y (2 002 ) st a t ed , man y e x ce l l e nt e mp l o ye e s l e ft t he fi rms du e t o t he
e arl y r e t i re men t pl a ns . Th i s me an s t h at t h e o rga ni z a t i on al k no wl e d ge
a nd m e mo r y i n t h e fi rms a re l os t b y dow n si z i n g ( Gre go r y, 1 999 ). It i s
ob vi o us t ha t t he ex ce l l en t hu ma n re so u r c es move d t o ot h e r f i rms i n t he
s am e i ndu st r y ha s n ow b ec o me t h e t h re a t for t he fi r ms t ha t i mpl e me nt e d
e arl y r e t i re men t pl a ns . To ca r r y o ut t he do wns i zi n g pl a ns , t o p
man a ge men t s hou l d t h i nk a bo ut h ow t o s uc c es sfu l l y r e duc e t h e
wor kfo r ce .

Di s cus s i on : C ons i de r at i on of Wo rk Sh ar i ng
T he prob l e m t ha t t h e t op ma na ge rs h av e t o co ns i de r ne x t i s ot h er
op t i on s (e . g., B u s h, 19 96 ; De P a mphi l i s , 20 01 ; We st o n, C h un g, & Si u,
19 98 ) t o rev i t al i z e t h e fi r ms . In a ddi t i o n t o t he ne ga t i ve eff ec t s , t he r e
a re s o me i s s ue s on t h e d owns i z i n g. As J a pan Prod uc t i vi t y C en t er fo r
So ci o -E co no mi c De ve l op me nt (1 999 ) a n d E LIC NEC (20 02 ) a rgu ed ,
do wns i zi n g c an b e a re as on ab l e a ct i o n f or i n di v i dua l fi rms bu t i t
i nc rea s es t he un e mp l o ym en t r at e , de cr e a s e s c on su mp t i on , an d ma k es
t he J ap an es e e c ono m y wors e a s a who l e. Fro m t he ma cro -e c ono mi c
a sp ec t s, Ni k ke i 49 46 .c om (20 02 ) a l s o i n di ca t e d t ha t do wns i z i n g
i nc rea s ed so ci a l co s t s t h at i mpo se d a bu rde n o n a l l t he fi rms i n J ap an i n
t e rms o f h i ghe r un e mpl o ym en t i ns ura n c e ra t es t h a n e ve r.
T he Mi ni s t r y o f He al t h , La bou r an d We l fa re (20 01) re po rt e d t h at
bo t h l a bo r an d man a ge m en t sh owe d d e e p i nt e res t i n t he i nt ro d uc ti o n o f
t he wor k sh a ri n g i n t h e c orp or at i o ns . As Ma en a ka a nd Na t or i (20 02 )
po i nt e d o ut , whe n t h e a ct u al u ni t wa ge o ut p erfo rms t he ma rgi n al
pro duc t i vi t y of l a bo r, t he fi r ms sh ou l d mov e t o wa rd t h e e q u il i b ri um
be t wee n m a rgi na l p r od uc t i vi t y an d t h e a ct u al u ni t wa ge b y t h e
red uc t i on of w a ges or t h e l a bo r i npu t (i . e., mu l t i pl yi n g t h e n umbe r of
t he e mp l o ye e s a nd l ab or ho urs ). The Mi n i st r y of H ea l t h, La bo ur, a nd
We l fa re d e ci d ed t o o ffe r t he pu bl i c as s i st a nc e t o fi rms t ha t ad op t ed t he

wor k sh ari n g pl a ns i n J a pa n ( Ma i ni c hi Int e rac t i ve , 20 02 ). Ko ba ya sh i
(20 02), t h e s e cre t ar y- ge n e ra l of Th e J ap an C om mi t t e e fo r E co no mi c
Dev el o p men t , ap p e a l e d t o l ab or a nd ma n a ge me nt t o co ns i de r t he
i mpl e me nt a t i on of t he wor k s h a ri n g pl a ns . Mo r eo ve r, t h e co mmi t t ee
t ha t i nv ol v ed gov er n me nt , R e ng o (l a bo r u ni o ns ), an d t he c h a i rm a n of
Th e J ap an Fe d e ra t i on of Empl o ye rs ’ As s oc i at i on a gr ee d t o i mp l e me nt
t he wor k sh a ri n g (T he Ma i ni c hi Sh i mb u n , 20 02).
Mon da y Edi t i o n (2 002 ) st a t ed t ha t wor k s h ari n g i s one of t h e
pro pe r opt i o ns for J ap an es e co mp ani e s f ro m t he as pe ct s of s ol v i n g
t ho s e p ro bl e ms . As Empl o ym ent De ve l o p me nt D e pa rt m e nt ( 20 00 ) a nd
B us h (1 99 6) rep ort e d , wor k sh ari n g ca n re du c e so m e o f t h e n e gat i v e
e ff e ct s o f th e o rga ni z at i o na l ch an ges i n co mp ari s on wi t h do wn s i zi n g.
Ged de s (1 99 7 ) al s o i ndi c at e d t h at t h e fi rms c o ul d i mpro v e t he
pro duc t i vi t y t hro u gh i mp l e me nt i n g wor k s ha ri n g. In a ddi t i o n, Ma e na ka
a nd Na t ori (20 02 ) p oi n t ed out th at Ja pa ne se pri v at e co ns u m er s pe nd i n g
was i n cr ea s ed b y t h e i nt rod uc t i on o f wo rk s h a ri n g i nt o t h e f i rms ev en i f
t ot a l pe rs onn el e x p e n se s of t he fi r ms w e re at t h e s a me l e v el befo r e a nd
a ft e r t h e i mpl e m e nt a t i on o f t he wor k s h a ri n g.
Ho we ve r, t he r e a r e s ome ob st a cl e s t o i n t ro du ce wo r k s ha ri n g i n
J ap an es e c o mpa ni e s du e t o cu rr e nt m a na ge m e nt s ys t ems an d l e ga l
a sp ec t s i n J ap an (Is hi kaw a , 20 02; Ke i d a nre n, 2 002 ; “O c ha n oma

Hou ri t s u ,” 2 002 ; Th e Eh i me Sh i mb un, 2 00 2). Ma i ni c hi In t e r a ct i ve
Deb at e (20 01) s t a t e d t hat Ser v i c e Za ng y o (i .e ., t he po pu l a rl y p e rfo rm e d
vo l un t ar y o ve rt i me wor k wi t h out a n y al l o wan ce s o f t he ov e rt i me wo r k
t ha t was i l l e ga l i n t h e s t ri ct s e ns e ) a nd t h e di ffi cu l t y t o t a ke pa i d
va c at i on s we re t h e ma j or p ro bl e ms rel a t ed t o wo rk s ha ri n g. Ma e na ka
a nd Na t ori (20 02 ) s h owed t ha t t he e ff e c t i v ene s s o f wor k s h a ri n g
de pe nd ed up on t h e t yp e s o f i nd us t r y i n t h e J a pa n e se c a s e a n d , fro m t he
a n gl e of t h e s up pl y si d e, t h e wo rk s ha ri n g r e duc e d t he wo r k hou rs o f
t he e mp l o ye e s wh os e p ro du ct i v i t y of a d d ed va l ue wa s be t t e r t h an t he
ot h er e mpl o ye e s i n t he fi r ms . Ii da (20 02 ) p oi n t ed out t h at t h e wo rk
s ha ri n g wa s goo d fo r b l ue co l or wo r ke rs but n ot e ffe c t i ve fo r whi t e
c ol or wo rk ers . As Ai za wa (20 02 ) and K an sa i Kei e i s ya Kyo k ai (20 00 )
s ho we d, t h e i n t rodu ct i o n o f wo r k s ha ri n g i n J ap ane s e fi r ms re ma i ns a s a
mat t e r t o b e d i sc us s ed fu rt he r.
In ei t h er c as e, i mp l e men t i n g down si z i n g or wor k sh a ri n g, t he
s t rat e gi c pl a nn e rs i n t he fi r ms s ho ul d t re at t h e e mpl o yee s as i mpo rt a nt
hu man re s our c es . T h e s t rat e gi s t s s hou l d c ho os e t h e b es t org an i za t i onal
c ha n ge pl a ns for e ac h fi rm b a se d o n a t ho rou gh d i s c us s i on fr o m t h e
va ri ou s a n gl es . T h e re se a rc h e rs o n t h e c orpo rat e s t ra t e gi es s ho ul d
c ar e fu l l y i n ve st i gat e t he e ffe ct i v en es s a nd l i mi t at i on s of wo rk s h ari n g
i n J a pa n.

Fu t ure Re s e a rc h N e e ds
T here are fi ve ma i n p oi n t s t o be co ns i de red i n fut u r e re s e ar c he s
on t he do wns i zi n g b a s ed on t he l a rge s a mpl e s . Fi rst , as C ol e ma n (1 999 )
s t at e d, J a pa n es e co mp an i es t e nd t o red uc e t h e wo rkfor ce o v er s e v era l
ye a rs t o re du c e t he pa i nfu l effe c t s of do wns i zi n g. Mo reo ve r, C od e-m an
(20 00) i n di c at e d t h a t t h e re se arc h e rs o n d owns i z i n g n ee d e d t o co l l ec t
furt h er fi na nc i al d at a t o i n ve st i gat e t he eff e ct s of d owns i z i ng i n J ap an .
Th ere fo re, t h e re s e a rc he rs n ee d t o ex am i ne t he pro fi t a bi l i t y or t h e ra t es
of c ha n ge s i n t h e s t o ck p ri ce s i n t h e l on ge r t er m t ha n t h e t i me fra me of
t hi s re se ar c h.
S ec on d, a s Luri e (2 002 ) i ndi c a t ed , t he re i s a d i ff ere n ce o f t h e
de fi ni t i o n be t wee n d owns i z i n g a nd l a yo ffs i n t h e s t ri ct s e ns e o f t he
t e rmi no l o g y. T he di ffere n c e i s wh e t he r t h e wo r ke rs a r e d i sm i s se d
e t erna l l y o r t emp o ra l l y. The r es e a rc h ers s ho ul d p a y at t e nt i o n t o t he
di ffe r en c e s a nd c o l l ec t m ore d et a i l ed i n fo rm a t i on b as e d on t he s e s t ri ct
de fi ni t i o ns .
T hi rd, fu t ure re se a rc he s ne ed t o i nc l ud e ma cro- e co no mi c
va ri ab l es . B a s e d o n t h e i d ea s o f G al b ra i t h (1 996 ), t he r e i s t he l ow
ma rgi n a nd h i gh ma rgi n c yc l e du e t o t h e ma cro -e c ono mi c a sp ec t s.
Und er p ro sp eri t y, t h e m argi n s t en d t o i n cre as e as a wh ol e , a n d v i ce
ve rs a. Fu t ure res e a r ch ers are ex pe ct e d t o ex ami ne t he eff e ct s of

do wns i zi n g i n Ja p a n from va ri ou s a n gl es wi t h ma cro- e co no m i c
va ri ab l es .
Fo urt h , t he r ea so ns wh y t h e hi d den co s t s o f down si z i n g ma y b e
offs et b y t h e b en e fi t s of t h e re o rga ni z at i o n i n t he non -profi t a bl e fi rms
re ma i ns un so l ve d. T h e d owns i z i n g e ffe c t s on t h e o ve ral l p ro fi t ab i l i t y i n
t he no n-pro fi t ab l e fi rms a re mat t e rs t o b e di s c us se d fu rt he r. Fut u re
res e a rc h e s s ho ul d i nve s t i ga t e t h e d et a i l s re l at e d t o t he p ro bl ems , s u c h
a s t h e e x i s t e nce o f o pe n c o m mu ni c at i o ns an d i n sp i red l ea de r sh i p du ri n g
t he do wns i zi n g p eri od s.
Fi n a l l y, t h e re se a rc h e rs m u st b e c are ful wi t h t h e e x i s t e nce of t h e
ov era l l co rpora t e s t r at e gi e s whi l e t he fi r ms ar e i mp l e men t i n g
do wns i zi n g. Ka sh e fi (20 02 ) a nd R HR Int ern at i o na l C o mpa n y (1 99 7)
s ai d t ha t t he re wer e t wo t yp es o f t h e d o wns i z i n g: p ro a ct i v e a nd re a ct i ve .
Acc ord i n g t o t he cl a s si fi c at i o n b y Kas he fi (20 02), t h e d owns i z i n g t ype s
i n t h i s re s ea r ch ma y b e a mbi gu ou s. M or e ove r, a s C a pp el l i ( 19 99 )
s ho we d, wh et h er t he s t oc k p ri c es a re i n c re as e d de pe nd s o n t h e
e x i s t en ce of t he c o r po rat e r es t ruc t uri n g pl a ns . The s t oc k p ri c es a re
de c re as e d b y do wns i zi n g whe n t h e fi r ms t h at i mp l e men t ed t h e
do wns i zi n g d i dn ’t h av e a n y re s t ru c tu ri n g pl a ns i n t h e o v e ra l l co rpo ra t e
s t rat e gi e s (C a pp el l i , 1 999 ). In J ap an , as Ya ma gu ch i ( 199 9) i n di c at e d, i n
man y c as es , t h e d ow ns i z i n g w a s ca rri e d o ut b y t he fi rms a s a pa rt of t h e

c orpo ra t e re s t ruc t ur i n g pl a ns . Th e r efo re , t he res e ar c he rs s ho ul d
pre ci s e l y i nv es t i gat e t he ove r al l c orp o r at e s t rat e gi e s i n t he fi rms t ha t
i mpl e me nt e d t h e d o wns i zi n g t o ex ami ne t he e ffe ct s o n t he c orpo ra t e
fi na nc i al p erfor m an ce s i n J ap an .

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Chapter Ⅱ. LITERATURE REVIEW………………………………………... 8

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Table Number and Title Page

1. The Negative Consequences or Hidden Costs of Downsizing ………………………. 14

©2002. Tomonori Tomura. All Rights Reserved.

C h ap t er One – Int ro duc t i on

Ind us t ri al C o rp ora t i on, sa i d t o hi s s ubo rdi na t es , “ If so me bo d y as ks yo u

wha t yo ur c o mp a n y p rodu ce s , pl e as e ans we r t h e p ers on t ha t ou r

c omp a n y p rod u ce s h u ma n re so ur c es an d, a dd i t i ona l l y, we p r o duc e

e l ect ri c p ro du ct s .” ( Is e, 200 2, p a ra . 4).

J a pa ne s e co rpo ra t i o n s h av e b e e n s t ru g gl i n g wi t h s ev ere rec e s s i on

s i nce t h e c ol l a ps e o f bu bbl e pro sp er i t y. C o y (2 002 ) rep o rt ed t ha t

Ni kkei 2 25 -s t oc k i n de x (Ni kkei ) h a d r e co rde d t he hi gh e s t p oi n t at

38 ,91 5 o n Dec emb er 29 , 19 89 , howe ve r, t he Ni kke i (at 979 1. 4 3 po i nt s

Ave ra ge (a t 99 20. 00 p oi n t s o n Th urs da y, J a nua r y 3 1, 2 002 ) f or t he fi rst

t i me s i nc e 195 7. Ac co rdi n g t o Yo s hi da ( 19 98), J a pa n e se fi r ms ha d t o o

man a ge men t s ys t e m s we re e x c el l e nt . Oh ba (200 1) po i nt e d o ut t ha t ,

un t i l 19 93, mo st o f al l J a pa nes e fi rms c o ul d n’t s eri ou s l y re a l i ze t he

©2002. Tomonori Tomura. All Rights Reserved.

Kwon (20 01) e x p l ai n ed t hat Ja pa n e se fi rms h a dn ’t ad op t ed l a yo ffs

on a l arge s ca l e b ut kep t l on g-t er m co nt r ac t s wi t h t he e mp l o ye e s b as ed

on i mpl i ci t con t ra c t t he or y. Thi s i s be ca us e t he co mp an i es c o ul d

pro vi de e nou gh s a l a ri e s an d po s i t i ons i n t he wo r kpl a ce s fo r t he

e mp l o ye e s u nt i l t h e mi d 1 990 s (Kwo n, 2 0 01 ). Ho wev er, t h e

s ys t e m c ol l a ps e ( Ko s u gi , 19 99 ; Su z u ki , 20 01; Tri p od , 20 01). Ac co rdi n g

i nc rea s ed si n ce 19 9 7. The Mi n i st r y o f Fore i gn Affa i rs (2 00 2 ) s howe d

t ha t t he J ap an es e un e mpl o yme nt ra t e s h a rpl y i nc re a se d b y 1 .3% fo r 2

ye a rs : Un e mpl o yme nt ra t e wa s 3.4 % i n 1 99 7, 4 .1% i n 19 98 , an d 4 .7% i n

19 99 . C NN.c o m (20 01 ) re po rt e d t h at t h e J a pa n e se un e mpl o ym en t r at e i n

Nov em be r, 20 01 wa s 5.5% a nd con s u me r pri c e i n d e x h ad be en drop pi n g

for 2 6 s t rai ght mont h s unt i l No ve mb e r, 2 001 .

Ya m an e (1 999 ) a rgu ed t ha t t he hi ghe r fi x ed co st s s uc h a s

pe rs onn el e x p en se s , fi nan ci n g c os t s , an d s o fo rt h ha d b e e n b urde ns on

of t h e fi r ms. Th e re f ore , t he pr e ss ure for c os t redu ct i o n d rov e t he

©2002. Tomonori Tomura. All Rights Reserved.

of t h e fi r ms. Ho w ev e r, a s T h e Eco no mi c Pl an ni n g A ge nc y (1 999 )

do wns i zi n g m ad e i t p os s i bl e fo r t he fi rms t ha t i mpl e me nt e d t he

do wns i zi n g t o i mp ro ve t he co s t st ru ct u re of t h e fi r ms, b ut o n t h e o t her

ha nd t he co rpora t e d owns i z i n g cou l d m a ke t h e re c es si o n wo rs e i n t h e

do wns i zi n g o n t h e c orpo ra t e fi n an ci a l pe rfor ma nc e s i n J a pa n.

Downs i z i n g i s b oo m i n g a mo n g J a pa ne s e fi rms . It i s i mp ort a n t for

s t rat e gi c pl a nn e rs i n e ac h fi r m, i nve s t or s , or ot h er s t a ke h ol d ers t o know

whe t he r t he down si z i n g bri n gs fa vo ra b l e e ffe c t s fo r t h e c o rp orat i o ns

Sta t eme nt o f t he Pro bl e m

T he purp os e o f t hi s res ea rch i s t o e x a mi n e t h e e ffe c t s o f

do wns i zi n g o n t h e c orpo ra t e fi n an ci a l pe rfor ma nc e s i n J a pa n. The re a re

ma rgi ns . The s ec on d h ypo t he si s i s t ha t t he rat e s o f ch an ge s i n t he st o ck

pri c es o f t h e fi r ms t hat ado pt e d t h e d o w ns i z i n g o ut p e rfor m t he rat e o f

©2002. Tomonori Tomura. All Rights Reserved.

T hi s res ea rch us es Ka i sh a S hi ki h ou C D-R OM P e rfe c t Ve rs i o n

20 00 (Shi ki hou , 20 0 0) a nd 20 02 (S hi ki h ou , 200 2). S hi ki h ou (2 00 0,

20 02 ) we r e p ub l i sh e d b y To yo Kei z a i Sh i n po-s ha i n To k yo. The se

C D-R OMs ha v e i n t ot a l , t e n- ye ar c o rpo rat e fi n a nc ia l d at a a n d fi ve - ye ar

wi t h t h e J a pa nes e st o ck m ar ke t b a s ed on a nn ua l rep ort s of t h e fi r ms .

c hi -s qua r e fo r i nd e p e nd en c e t es t s wit h 2 x 2 c on t i nge nc y t a b l e s . TO P IX

(TSE) a r e a v a i l ab l e a t TSE (2 00 2b, 2 00 2 c ).

T hi s st u d y as s u mes t ha t t he fi r ms i mpl e me nt e d t h e d owns i z i n g

whe n t h e r a t es of c h a n ges i n t h e n u mbe r of t he e mp l o ye es w e re