This study examined the association between financial difficulties of institutions of higher education and their organizational effectiveness with 334 colleges and universities. An investigation of this relationship was made using three variables: a decline in required financial resources, degree of organizational effectiveness, and a set of 12 dysfunctional organizational attributes associated with downsizing. Surveys were distributed to trustees, institutional administrators, and academic department heads at 334 four-year colleges and universities with responses from 927 trustees, 1321 administrators, and 1158 department heads. The nine dimensions of organizational effectiveness identified by Cameron (1978) were measured and colleges and universities were then categorized as high, medium, or low performance organizations, based on their composite scores on these dimensions. The presence of the dysfunctional attributes was also assessed for each institution. The results indicated that institutions facing downsizing and financial decline can remain effective if negative organizational attributed are not allowed to emerge. If, however, these do emerge, then organizational effectiveness is reduced. Five tables and figures are appended. (Contains 50 references.) (JLS)