Disclosure of outsourcing in the annual report: Causes and market returns effects

Firms increasingly are utilizing outsourcing to enhance or maintain their competitiveness. Prior research shows that capital markets value a firm's decision to outsource. This study uses a sample of firms announcing outsourcing arrangements in a press release to examine which factors are associated with the subsequent decision to voluntarily provide or withhold information about outsourcing in their annual report. The paper also examines whether annual report disclosure is a reliable signal of future market performance. We find that underperforming firms, larger firms, and firms experiencing negative outsourcing announcement market returns and negative long-term market returns are more likely to disclose outsourcing in their annual reports. There is also evidence that firms' disclosure of outsourcing in the annual report signals an improvement in market performance that is credible to the capital markets. We contend that the disclosure and subsequent firm performance issues we investigate apply to any type of outsourcing arrangement, and therefore our results are relevant to future information systems research on this subject. Our findings also suggest that regulatory standards could reduce private information search costs for investors by providing a common disclosure methodology for outsourcing activities.

► We evaluate the market’s reaction (CARs) to initial voluntary outsourcing press release disclosures.
► We determine if annual report disclosures are associated with BHARs in the year following the disclosure.
► We find underperforming, large firms, and firms experiencing negative CARs and BHARs disclose outsourcing in the Form 10-K.
► We find evidence firms disclosing outsourcing in their Form 10-K signal credible improvement in future market performance.