Although `downsizing` has become a watchword, little empirical work has been done on examining the effect of downsizing on organization`s innovation. Invoking organizational slack and threat-rigidity effects framework, I examined the direct impact of downsizing on innovation, and moderating role of the situational variables on relationship between downsizing and innovation, using data from 189 listed companies in Korea. The results demonstrate that downsizing does in fact interfere with an organization`s innovation. Also, environmental munificence and corporate characteristics were found to moderate the relationship between downsizing and innovation. The implications for management practice are derived and directions for future research suggested.