Information Systems Outsourcing Announcements: Investigating the Impact on the Market Value of Contract-Granting Firms

Abstract

The objective of this research project is to examine the impact of information systems (IS) outsourcing announcements on the market value of contract-granting firms. This study is important to researchers, professionals, and policy makers as it provides empirical evidence from the capital market that outsourcing is considered to be a value-added business exchange for contract-granting firms. Research findings indicate positive and significant market value gains for smaller vs. larger firms and service vs. nonservice industry firms. The significant effects observed in this study are explained by the existence of information asymmetry in the capital market for smaller firms and service firms, and by the relatively higher investment made by service firms in information technology. This study contributes to accounting research by examining the importance of providing financial report users with nonfinancial forward-looking information concerning management's strategic decisions, such as the decision to outsource IS functions. Additionally, the current study complements and extends extant IS outsourcing research, as it integrates efficient market and capital market theory into ongoing investigations aimed at identifying the underlying determinants of IS outsourcing decisions.

Operational practices and financial performance: an empirical analysis of Brazilian manufacturing companies

“…The survey shows that outsourcing accounting services is more efficient only in terms of productivity. Hays, Hunton and Reck (2000) investigate the impact of outsourcing on share prices. Hays et al (2000) find empirical evidence that outsourcing has a positive effect on stock prices.…”

Information systems outsourcing reasons and risks: a new assessment

“…This is actually a limitation of the study that can be overcome by carrying out new analyses from the perspective of the provider of these services. Ang and Straub, 1998;Baldwing, Irani and Love, 2001;Clarck, Zmud and McCray, 1995;Grover, Cheon and Teng, 1996;Gupta and Gupta, 1992;Hayes, Hunton and Reck, 2000;Jurison, 1995;Hirschheim, 1993a-1993b;Loh andVenkatraman, 1992, McLellan, Marcolin andBeamish, 1995;McFarlan and Nolan, 1995;Slaughter and An, 1996;Udo, 2000; Bahli and Rivard, 2005;Barthélemy, 2001;Earl, 1996;Fink, 1994;Fowler and Jeffs, 1998;Glass, 1996;Guterl, 1996;Hurst and Hanessian, 1995;Jurison, 1995;Lacity and Hirschheim, 1993b;Martinson, 1993;Palvia, 1995;Willcocks and Lacity, 1999;Willcocks and Fitzgerald, 1996;Willcokcs, Lacity and Kern, 1999; …”

“…Market forces are somehow driving firms to outsource everything but the core business (Gupta and Gupta, 1992). And outsourcing makes it easier for these firms to focus on their basic competences (Grover, Cheon and Teng, 1996;Hayes, Hunton and Reck, 2000;Lacity, Hirschheim and Willcocks, 1994;Smith, Mitra and Narasimhan, 1998;Willcocks, Feeny and Olson, 2006). In the computer area this liberates line managers -who do not have to coordinate with a large IS department-thus simplifying the organisation.…”

An Integration Model of the Impact of IT Investment Announcements on Firm Market Value

“…The researchers explain the advantages and disadvantages of outsourcing on firmsby learning the impact of IT outsourcing announcementson firm market value. Hayes, Hunton, &Reck (2000) and Peak, Windsor, & Conover (2002)indicate thatIT outsourcing cannot bring excess profits. However, Oh and Gallivan (2004), Oh, Gallivan, & Kim (2006), and Agrawal, Kishore, &Rao (2006) point out that there is a significant relationship between IT outsourcing andfirm market value.…”