The Impact of Perceived Risk on the Capital Market's Reaction to Outsourcing Announcements

Creators: Gewald, Heiko and Gellrich, Tom
Title: The Impact of Perceived Risk on the Capital Market's Reaction to Outsourcing Announcements
Item Type: Article
Journal or Publication Title: Information Technology and Management (IT&M)
Page Range: pp. 279-296
Date: 2007
Divisions: Informationsmanagement
Abstract: Outsourcing is a widely accepted option in strategic management, which, like every business venture, bears opportunities and risks. Supplementing the popular area of research on the merits of outsourcing, this paper examines how stockholders rate corporate sourcing decisions with regard to the risk they associate with this transaction. Using event study methodology and multivariate cross-sectional OLS-regression, we analyze a sample of 182 outsourcing transactions in the global financial services industry between 1998 and 2004 in order to investigate the risk-specific drivers of excess returns to shareholders. The analysis studies the impact of risk-specific independent variables, including transaction size, length, outsourced business functionality, and experience with outsourcing. Our findings indicate that risk-mitigating strategies have significant explanatory power, indicating that the capital market’s reaction to an outsourcing announcement might at least partly be forecast. Results show a positive correlation between market reaction and business process outsourcing by financial services companies. We also find strong evidence indicating that capital markets react positively to relatively large transactions compared to the market capitalization of the outsourcing firm. For service providers our results show that traditional IT-related sourcing projects or the insourcing of administrative processes have a significant positive correlation with market reaction.
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Citation:

Gewald, Heiko and Gellrich, Tom (2007) The Impact of Perceived Risk on the Capital Market's Reaction to Outsourcing Announcements. Information Technology and Management (IT&M), 8. pp. 279-296. ISSN 1385-951X (Print)

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