What does Stock and Accounting Performance tell us about Outsourcing?

Abstract

We investigate a large sample of US domestic outsourcing transactions from 1990 to 2003. We construct a data set that identifies the outsourcing client and vendor firms and use this data set to examine announcement effects on firm values and the post-event changes in accounting performance measures. We find that around the contract announcement date, vendor firms experience significantly positive abnormal returns; while in the long-run client firms realize significantly positive buy-and-hold abnormal returns. We also find evidence that our client firms experience significant improvement in operating efficiency for each of the three years following the contract taking effect. This change in operating efficiency is significantly positively related to the client firm's long-run abnormal stock returns. Our findings suggest that outsourcing contracts are beneficial to contract signatories, and the stock market recognizes this benefit. To our knowledge, this is the first study to investigate US domestic outsourcing contracts from the financial market and accounting performance perspectives.