Title Page

Acknowledgements & Dedication

I would like to thank Professor Swati Bhatt for helpful discussions regarding stock options, and Professor Alan Blinder for thoughtful advice regarding wage inflation. I owe deep gratitude to Professor Faruk Gul, who introduced me to the concept of games of asymmetric information, and was crucial to the success of the game theory models solved herein.

INSERT NICE COMMENT ABOUT STUDENT THESIS READERS HERE.

I am especially grateful for the advice and guidance of Professor Michael Woodford, who patiently read multiple and cumbersome drafts of this text, remained enthusiastic and helpful regarding research, and was innovative and invaluable with suggestions and comments for the foundation and improvement of this independent work.

I would like to dedicate this thesis to my parents, Eve and Jerald Lurie, and my grandparents Rosa and Werner Marx, who have been inspirational and supportive. Without their love and guidance, such an immense undertaking would not have been possible.

Finally, I would like to dedicate this thesis to all workers who were the victims of the senseless corporate downsizings of the 1990s. It is my fervent hope that further research in this field can be instructive to company executives as well as investors, and can lead them to alternative strategies to avoid needless job destruction.

Jonathan Matthew Lurie

Princeton University Class of 1998

Department of Economics

001 Fisher Hall

Princeton, New Jersey 08540

Overview

I.	Introduction to Downsizing	x
II.	Why do Firms Downsize?	X
III.	Downsizing in Corporate America: An Event Study	X
IV.	The Pseudo-Downsizing of AT&T	X
V.	The Strategic Aspects of Information and Incentives	X
VI.	Extensions to the Game: Recessions and Inefficiency	x
VII.	Dumbsizing: The Case of Delta Airlines	x
VIII.	Conclusion	X
IX.	Appendix	X
X.	References	X

Detailed Contents

I.	Introduction
I.1.	Downsizing as a Signaling Phenomenon	x
I.2	Scope of the Downsizing Study	x

II.	Why do Firms Downsize?
II.1.	The History of Downsizing	x
II.2.	Downsizing as a Corporate Strategy	x
II.3.	Downsizing in the Macroeconomy	x
II.4.	A Model of Labor Demand	x

III.	Downsizing in Corporate America: An Event Study
III.1.	Selection of the Companies	x
III.2.	A First Glance: Modeling Downsizing as a Rare Event and Relevant News	x
III.3.	Relevant Variables to the Event Study	x
III.4.	Predicting Returns with Available News	x
III.5.	Predicting Future Returns with the Return from the Day of the Downsizing Announcement	x
III.6.	The Importance of Expectations of Downsizing	x
III.7.	Interpretations of the Event Study	x

IV.	The Pseudo-Downsizing of AT&T
IV.1.	The Surprise Downsizing of AT&T	x
IV.2.	The Downsizing That Never Was	x
IV.3.	A Model for Downsizing	x
IV.4.	A Signaling Game in Which No Signaling Takes Place	x

V.	The Strategic Aspects of Information and Incentives
V.1.	A Theoretical World of Perfect Information	x
V.2.	A Game of No Access to Information	x
V.3.	Changing Management’s Pay Structure	x
V.4.	The Importance of Information and Incentives	x

VI.	Extensions to the Game: Recessions and Inefficiency
VI.1.	Calculating Threshold Probabilities for the Game	x
VI.2.	Playing the Game during a Recession	x
VI.3	Inefficient Firms and Downsizing	x

VII.	Dumbsizing: The Case of Delta Airlines
VII.1.	Delta’s Downsizing: "Leadership 7.5"	x
VII.2.	How Leadership 7.5 Backfired	x
VII.3.	Corporate Strategy: Delta vs. United	x
VII.4.	Applying the Inefficiency Game to the Corporate Strategy of United and Delta	x

VIII.	Conclusion
VIII.1.	Resolving the Mystery of Downsizing	x
VIII.2.	The End of the Downsizing Era	x

IX.	Regression Data
IX.1.	Daily Return to the Downsizing Companies	x
IX.2.	Regressions Pertaining to Inflationary Expectations	x
IX.3.	Regressions Pertaining to the Event Study	x

X.	References
X.1.	Academic Publications	x
X.2.	The Popular Press and Industry Journals	x
X.3.	Corporate and Governmental Sources	x