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Outsourcing flexibility under financial constraints

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  • Choi, Jongmoo Jay
  • Ju, Ming
  • Trigeorgis, Lenos
  • Zhang, Xiaotian Tina

Abstract

We posit that outsourcing flexibility helps overcome financial constraints and provide evidence concerning the role of financial constraints and its interaction with operational flexibility on the likelihood and market value of outsourcing. We find that the likelihood of outsourcing is higher the greater the firm's financial constraints prior to outsourcing and that the effect of financial constraints on the likelihood of outsourcing is greater the lower the ex-ante operational flexibility, suggesting partial substitution between financial and operational flexibility. We further show that the market value impact of outsourcing announcements is predominantly positive confirming net flexibility gains positively related to ex-ante financial constraints. Our findings suggest that outsourcing is a vehicle for flexibility acquisition and that financial constraints play a prominent role.

Suggested Citation

  • Choi, Jongmoo Jay & Ju, Ming & Trigeorgis, Lenos & Zhang, Xiaotian Tina, 2021. "Outsourcing flexibility under financial constraints," Journal of Corporate Finance, Elsevier, vol. 67(C).
    • Handle: RePEc:eee:corfin:v:67:y:2021:i:c:s0929119921000109
    DOI: 10.1016/j.jcorpfin.2021.101890
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    Cited by:

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    2. Luis García‐Feijóo & Benjamin A. Jansen, 2023. "International evidence on the association of leverage with stock returns and the value premium," The Financial Review, Eastern Finance Association, vol. 58(2), pages 315-341, May.
    3. Ebina, Takeshi & Kumakura, Yuya & Nishide, Katsumasa, 2022. "Hostile takeovers or friendly mergers? Real options analysis," Journal of Corporate Finance, Elsevier, vol. 77(C).
    4. Chortareas, Georgios & Noikokyris, Emmanouil, 2021. "Investment, firm-specific uncertainty, and financial flexibility," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 25-35.
    5. Jongmoo Jay Choi & Ming Ju & Jose M. Plehn-Dujowich & Xiaotian Tina Zhang, 2022. "Outsourcing as a cooperative game between the CEO and labor: theory and evidence," Review of Quantitative Finance and Accounting, Springer, vol. 59(3), pages 1095-1131, October.

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    More about this item

    Keywords

    Outsourcing; Real options; Financial constraints; Financial flexibility; Operational flexibility; Supply chain; Boundaries of the firm;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • L24 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Contracting Out; Joint Ventures

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