Firm Value:

Over the last decade, an increasing number ofoutsourcing contracts have been signed. Weinvestigate a large sample of outsourcing contractssigned by firms listed on the US markets from 1990through 2003. We construct a data set that identifiesthe outsourcing client and vendor firms and use thisdata set to examine announcement effects on firmvalue and the post-event changes in both the stockand accounting measures of performance. We find thataround the contract announcement date, vendor firmsas a whole group experience significantly positiveaverage abnormal stock returns; while client firmsrealize positive abnormal returns when their sizesare small, when they outsource to bigger vendors,when they are opaque firms and need to focus on theircore activities, and when their liquidity levels arelow. We also find evidence that client firmsexperience both significantly positive buy-and-holdabnormal stock returns and significant improvement inoperating efficiency in three years following thecontract effectiveness. Our study bridges efficientcapital market theory and firms' business strategies,providing management a useful guidance with theiroutsourcing decisions.