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The Effect of Offshoring on Firm Value and Performance

We study the wealth effect of offshoring by analyzing announcement-period abnormal stock returns and post-announcement-period operating and stock return performance of firms that offshored their activities in 2000-2005. Announcement-period stock returns are inconclusive for the overall sample; however, they are positive for firms that offshore activities primarily to reduce costs, but negative for firms that offshore activities for other reasons. The differences between the two sub-samples are significant for all windows. Also, announcement-period stock returns are higher for firms with larger size, better operating performance, lower growth potential, and higher cost of goods sold in the year prior to the offshoring announcement. Offshoring firms have poor stock return performance during the three-year period prior to the offshoring announcement and have small improvements after that. Further, firms that offshore activities primarily to reduce costs enjoy improved operating and stock return performance in the years following the offshoring, whereas firms that offshore activities for other reasons do not enjoy such improvements. In the years after offshoring firms that offshore activities primarily to reduce costs have lower cost of goods sold and capital expenditures but more employees than matching non-offshoring firms. Overall, our findings indicate that not all firms enjoy the benefits of offshoring but only those that offshore primarily to reduce costs.