The Association of Future Profitability, Operating Cash Flows, and Market Assessments with Offshoring Arrangements of Technology Jobs

We investigate future profitability, operating cash flows, and value relevance of offshoring arrangements in the technology sector. Offshoring is the business practice of moving portions of a firm's business operations (and jobs) to another country usually to take advantage of lower labor costs or other production factors in developing countries. Offshoring carries political costs as local jobs are lost which may limit market-based realization of benefits. We find that offshoring firms in the technology sector report greater earnings and operating cash flows following an offshoring event substantiating the decision to offshore. Further, the market values offshoring beyond the impact recognized in the financial statements. However, the premium is constrained as firm size increases consistent with political cost arguments. We document both benefits and costs that are important for firms considering offshoring arrangements and their stakeholders