When a firm’s performance falls short of aspirations, organisational changes can help stop the bleeding and get things back on track. Broadly speaking, firms have two strategic avenues to consider. The first is growth-related strategies to improve the firm’s position and performance, which could range from mergers and acquisitions to introducing new products and expanding factories. The second is corporate downsizing actions such as divesting from loss-making units, closing production facilities, selling peripheral assets and conducting layoffs.

Compared with other forms of restructuring, corporate downsizing, especially workforce reduction, is regarded as a quicker and simpler way to respond to performance shortfalls and is therefore widely used to address such issues. By releasing resources and enhancing operational efficiency, it is more effective in improving financial performance than other restructuring activities.

However, CEOs generally don’t like to engage in corporate downsizing, even if it may be the best way to address poor performance. Given its association with reducing operational scope and laying off workers, it can be viewed negatively by external stakeholders and provoke internal resistance. It also reduces the size of the firm, and, as CEO compensation is often tied to firm size, can adversely influence their salary.

In our recent study published in the Journal of Management Studies, my co-authors (Wei Shi and Boshuo Li from the University of Miami) and I examine how a CEO’s internal attribution tendency – the extent to which they attribute an observed outcome to internal factors – can affect whether they undertake corporate downsizing activities in response to performance shortfalls.

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