Firms have increasingly engaged in Mergers and Acquisitions (M&A) activities in recent years. A common strategy following M&A is employee downsizing that aims at achieving strategic goals and enhancing performance. This approach, however, raises concerns from a strategic human resource management (HRM) perspective. Research suggests that downsizing may breach employees' psychological contracts and hinder the development of firm-specific human capital. While this viewpoint has an intuitive appeal, we reconsider it by suggesting that, in the M&A context wherein employees expect significant organizational changes, downsizing does not necessarily lead employees to negative reactions. Instead, if acquiring firms have strong employee-oriented HRM policies and continue to adopt similar policies after the acquisition, employees may interpret downsizing as a strategic managerial action to facilitate organizational changes. Using a representative sample of 5,338 firm-year observations from 1,174 U.S. publicly traded firms between 2002 and 2018, we found that both pre-acquisition investment in employee-oriented HRM policies and the post-acquisition adoption of such policies by acquiring firms positively moderate the negative relationship between employee downsizing following M&A and labor productivity. We discuss the implications of these findings for both research and practice.
