Stock Market Reaction to Domestic Outsourcing Announcements by U.S. Based Client and Vendor Firms

Abstract

Recently, there has been tremendous debate over job losses associated with corporate outsourcing of U.S. jobs. Although outsourcing is not a new phenomenon, the recent concern is fuelled in part by the fact that jobs are now outsourced to foreign countries, and for the first time, white-collar jobs are involved. Some support outsourcing on the grounds that it is beneficial to the U.S. economy; others vehemently oppose it, since workers may pay a heavy price as a consequence. In this paper, we examine the market reaction to outsourcing announcements for both client and vendor firms. The study examines a sample of U.S. based firms involved in outsourcing announcements over the 1991-2005 periods. Using a well-established event study methodology, the stock market reactions to such announcements are measured. The market appears to be neutral regarding the effect of outsourcing on client firms and the economy as a whole. The market does however react favorably to outsourcing with respect to vendor firms.