The Market's Perception of the Transactional Risks of Information Technology Outsourcing Announcements

Abstract

Despite the fact that several event studies have investigated the market's reaction to information technology (IT) investment announcements, little is known about how specific transactional risks influence the market value of a firm. This study examines stock market data to assess investors' responses to various transactional risks associated with IT outsourcing. More specifically, we develop and test several hypotheses to understand how transactional risks that arise due to a range of factors (i.e., the size of outsourcing contracts, difficulties in performance monitoring, asset specificity of IT resources, vendor capability, and the lack of cultural similarity between client and vendor firms) influence investors' reactions to IT outsourcing announcements. Our results indicate that most of these factors indeed significantly influence investors' perceptions of the risks involved in IT outsourcing. We discuss these findings in a larger organizational context and offer implications for both research and practice. In particular, our study offers a theoretical rationale for why negative reactions to IT outsourcing announcements may occur, while providing practitioners with several means by which they can increase the informational value of outsourcing arrangements.

Keywords:

• agency theory
• asset specificity
• event study
• industry similarity
• information technology outsourcing
• resource dependency
• transaction cost economics
• transactional risks
• vendor capability