Outsourcing Contracts and Equity Prices

As the focus of Information Technology outsourcing (ITO) and business process outsourcing (BPO) evolves from pure cost savings to diverse strategic objectives, the impact of externalizing these activities on the long‐term value of the firm surfaces as a key issue for researchers and practitioners. Principles of managing simple outsourcing initiatives may not be effective for complex relationships, and there is empirical evidence that firms may not make suitable managerial choices, especially in strategic outsourcing decisions. Capital markets may not be privy to such information when an outsourcing decision is announced, and hence respond with a delay, after the consequences of the initial choices become public knowledge. Thus, there may be long‐term abnormal returns from such outsourcing decisions. Based on theories of contracts and procedural coordination, we argue that simple (complex)