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Sales Force Downsizing and Firm-Idiosyncratic Risk

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The size of a firm’s sales force downsizing refers to the extent of planned reductions to a firm’s sales force. Salespeople are consistently one of the top positions laid off each quarter. It is a signal of market risk information that influences investors’ uncertainty regarding a firm’s future performance (i.e., idiosyncratic risk). Sales force downsizing decisions matter to Wall Street. Sales force management decisions driven by cost management concerns actually have unintended consequences that will offset any potential cost efficiency gains.

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Sales Force Downsizing and Firm-Idiosyncratic Risk

  1. 1. From:From: Panagopoulos, Mullins, and Avramidis (2018) What is Sales Force Downsizing and Why Does it Matter?  The size of a firm’s sales force downsizing refers to the extent of planned reductions to a firm’s sales force  Salespeople are consistently one of the top positions laid off each quarter  It is a signal of risk that influences investors’ uncertainty regarding a firm’s future performance (i.e., idiosyncratic risk)  Sales force downsizing decisions matter to Wall Street
  2. 2. From:From: Panagopoulos, Mullins, and Avramidis (2018) What Happens When Firms Downsize their Sales Force?  Because of lack of information, it’s difficult for investors to evaluate a firm’s “quality” and “intentions” related to the size of sales force downsizing. Thus:  Investors will screen firms for quality cues or the ability of the firm to effectively compete in the market after the downsizing  They will specifically screen firms for potential competitive threats  To mitigate these threats, firms should respond by engaging in high levels of advertising, which signals competitive viability during sales force downsizing
  3. 3. From:From:  Sales force downsizing increases firm-idiosyncratic risk, which is a key metric used by financial analysts to issue the risk ratings of stocks and it lowers subsequent risk-adjusted returns  Sales force downsizing can significantly influence a firm’s cost of capital (the rate as which it borrows money)  A 7.5% sales force downsizing translate into an increase of 17 basis points in yearly borrowing rates for the firm  If a downsizing firm elected not to reduce its sales force, it would have avoided an increase of 102 basis points in yearly borrowing rates  Sales force management decisions driven by cost management concerns actually have unintended consequences that will offset any potential cost efficiency gains  Reducing the sales force by 566 salespeople would provide $38.6 million in short-term cost savings  However, for the average firm with total liabilities equal to $10,016 million, the 17 basis points translate to an increase of $17.03 million in financial expenses  As such, the $38.6 million in cost savings are actually only $21.57 million, without taking into account other important downstream effects Sales Force Downsizing Matters to Wall Street Panagopoulos, Mullins, and Avramidis (2018)

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