Outso and Market Value

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Outsourcing and Market Value Relevance: Towards a Comprehensive Model

Pankaj Nagpal Andreas Nicolaou Kalle Lyytinen pxn18@case.edu

This Version: December 1, 2009

Abstract We analyze the joint effect of contract, vendor and client characteristics on abnormal returns of firms that have utilized large scale outsourcing. Based on hypotheses grounded in organizational control theory and a recent field study of successful outsourcers, we conduct an empirical validation of hypothesized effects. We use a comprehensive dataset on outsourcing augmented with public sources, and a new sample of IT outsourcing announcements for 20052007. Salient buyer factors include IT business integration governance and social organizational controls exercised by the focal or client firm, which we jointly label as IT Sourcing Capability (ITSC). In contrast to vendor size, we find a salient effect of vendor reputation. We also find differences in the impact of these factors across IT outsourcing and Business Process Outsourcing. Keywords: Outsourcing, Event study, Organizational controls, Firm level capability.

Acknowledgements: We would like to thank the reviewers and discussant at the AAA Annual Meeting, 2009, and seminar participants at the Naval Postgraduate School. The dataset was acquired through a grant from Kelvin Smith Library at Case Western Reserve University.

Electronic copy available at: http://ssrn.com/abstract=1478196

1. Introduction Information Technology (IT) accounts for a quarter of non-residential fixed investment, (Bureau of Economic Analysis 2006). Whilst the link between overall IT investment and productivity is well known (Stiroh 2002) it is less well known that a significant and increasing share of this IT investments is currently outsourced. As a conservative estimate, this share has reached 20% of IT budgets among Informationweek 500 firms (Vallis et al. 2008), a study of large firms in the United States. Moreover, anecdotal accounts suggest that...