Sourcing, Risk and the Financial Market

Outsourcing has become a commonly accepted alternative of strategic management. But how do stockholders rate the corporate decision to divest parts of the former business? We study the stock market reaction of outsourcing announcements of the global financial services industry, using event study methodology and multivariate cross-sectional regression analysis. We analyze a sample of 162 outsourcing transactions between 1997 and 2004 in order to investigate the drivers of excess returns to shareholders of outsourcers and insourcers in the global financial services industry. The analysis studies the impact of independent variables, the driving factors. Our findings indicate that many of these factors have significant explanatory power, indicating that capital market’s reaction to an outsourcing announcement might at least partly be forecasted. Partnering with experienced service providers significantly benefits the outsourcer. Evidence indicates that insourcers significantly benefit from large deals and transactions relating to traditional IT processes.