Does offshoring create value for shareholders?
We study the wealth effect of offshoring by analyzing the announcement-period returns as well as the long-run operating and stock return performance of firms that offshored their activities in the period 2000-2005. Announcement-period stock returns are positive for firms that offshore activities primarily to reduce costs but are negative for firms that offshore activities for other reasons. Also, announcement-period stock returns are higher for firms with a larger size, better operating performance, lower growth potential, and a higher cost of goods sold in the year prior to the offshoring announcement. Firms that offshore activities primarily to reduce costs enjoy improved operating and stock return performance in the years following the offshoring. Overall, our findings indicate that not all firms enjoy the benefits of offshoring; rather, only those that offshore primarily to reduce costs do.
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