Journal of Business Research

Transcription

1 Journl of Business Reserch 67 (2014) Contents lists vilble t ScienceDirect Journl of Business Reserch Humn resource outsourcing: Mrket nd operting performnce effects of dministrtive HR functions Mureen G. Butler, Crolyn M. Cllhn b, Sykes College of Business, The University of Tmp, 401 W. Kennedy Blvd., Box O, Tmp, FL 33606, USA b School of Accountncy, Fogelmn College of Business nd Economics, University of Memphis, A200 Fogelmn College Administrtion Bldg., Memphis, TN 38152, USA rticle info bstrct Article history: Received 1 Februry 2010 Accepted 1 August 2012 Avilble online 7 October 2012 Keywords: Administrtive humn resource outsourcing Cpitl mrket rection Operting performnce Endogeneity Event study Using event study methodology nd two-stge regression nlysis on smple of firms nnouncing humn resource outsourcing (HRO) contrcts, this study tests the ssocition between dministrtive HRO nd firm-level cpitl mrket nd long run operting performnce, with rchivl finncil dt controlling for endogeneity nd outsourcing decision optimlity. The results demonstrte tht the equity cpitl mrket responds positively to client firms nnouncing dministrtive HRO, prticulrly service firms nd those outsourcing trnsctionl HR tsks. Additionl sttisticl nlysis shows tht suboptiml outsourcing is negtively ssocited with long run operting performnce mesured s return on ssets nd operting return on ssets. This study contributes to outsourcing literture by more precisely quntifying outsourcing performnce through rchivl finncil dt nd employing cpitl mrket empiricl tests. Further, it controls for outsourcing decision optimlity in exmining long run operting performnce effects. This reserch focuses on HR, criticl function within the firm nd vlue enhncing to the firm Elsevier Inc. All rights reserved. 1. Introduction Firms outsource humn resource (HR) services for cost svings, efficiency, service improvements, ccess to HR expertise nd incresed flexibility (Bendorf, Brge, & Grzino, 2005; Lee, 2007; Mrquez, 2007; Oshim, Ko, & Tower, 2005). Trnsction cost economics (TCE) long with cpitl mrket nd resource bsed theories suggests n ssocition between outsourcing HR services nd overll firm performnce (e.g., Li & Chng, 2010). Yet the existing outsourcing literture hs not estblished n empiricl link between humn resource outsourcing (HRO) nd firm performnce, nor hs link been estblished to the equity cpitl mrkets. Prior HRO reserch primrily ddresses the client's decision to outsource (e.g., Adler, 2003; Delmotte & Sels, 2008; Kls, McClendon, & Giney, 2001; Kosnik, Wong-MingJi, & Hoover, 2006), chrcteristics of outsourcing clients (Kls et l., 2001), the outsourcing reltionship (Lievens & Corte, 2008), nd the effect of outsourcing on employees (Fisher, Wssermn, Wolf, & Wers, 2008; Kessler, Coyle-Shpiro, & Purcell, 1999). Given the fr-reching effect of the HR function within the firm, understnding the outsourcing decision impct is criticl for mngers desiring to improve profitbility nd equity mrket impct. Mnging firm's workforce effectively nd strtegiclly cn increse shreholder vlue by 10 to 20% (Becker & Huselid, 2003). This underscores the economic importnce of the HR system. Outsourcing HR services cn potentilly improve orgniztionl efficiency nd HR service Corresponding uthor. Tel.: ; fx: E-mil ddresses: mbutler@ut.edu (M.G. Butler), cmcllhn@memphis.edu (C.M. Cllhn). performnce, s well s provide significnt cost svings. In fct, some estimte tht trnsforming humn resources to optimize efficiency cn result in lbor cost svings of $9.8 billion for typicl Fortune 500 compny (Hnsen, 2008) nd should led to improved firm performnce. Understnding the mrket nd operting performnce effects of outsourcing is importnt to stkeholders nd investors, nd closes gp in the HRO literture (Shen, 2005). This study extends the HR literture in severl wys. First, prior studies hve lcked proprietry HRO dt, nd hve constructed proxies for outsourcing costs or relied on surveyed mngers' perceptions of performnce following outsourcing (e.g., De Vit, Teky, & Wng, 2010; Dickmnn & Tyson, 2005; Giney, Kls, & Moore, 2002; Gilley, Greer, & Rsheed, 2004; Kls, McClendon, & Giney, 1999; Lilly, Gry, & Virick, 2005). Heretofore, with few exceptions, reserchers hve not conducted empiricl rchivl studies seeking to link HR mngement to corporte performnce or mrket vlue (Abowd, Milkovich, & Hnnon, 1990; Jing & Qureshi, 2006). Second, in ddition to operting performnce, this study investigtes the cpitl mrket rection to firms nnouncing dministrtive HRO contrcts. Third, the reported results sttisticlly control for the boundry condition, optimlity of the outsourcing decision. Finlly, the study ddresses outsourcing HR services which cn directly nd indirectly ffect firm performnce through the services provided to nd tretment of employees. Wheres humn resource outsourcing encompsses brod rnge of functions, Kls et l. (1999, 2001) distinguish the prticulr types of HR functions exmined in this study, nmely, HR generlist, trnsctionl, humn cpitl nd recruiting. HR generlist ctivities include for exmple, performnce pprisl, plnning nd EEO/diversity. Trnsctionl /$ see front mtter 2012 Elsevier Inc. All rights reserved.

2 M.G. Butler, C.M. Cllhn / Journl of Business Reserch 67 (2014) ctivities re pyroll, benefits nd HRIS. Humn cpitl ctivities include trining nd development nd employee ssistnce, while recruiting involves stffing functions. The focus of this pper is on dministrtive HR services including pyroll processing, benefits dministrtion, employment verifiction, stffing, trining, nd workforce mngement. In summry, within the HRO performnce literture, this study is distinct in investigting overll stock mrket nd operting performnce of client firms to pinpoint empiriclly nd systemticlly, the impct of outsourcing criticl dministrtive HR functions on finncil performnce using rchivl finncil dt s n lterntive to perceived finncil operting performnce. 2. Theory nd hypotheses Trnsction cost economics (TCE), cpitl mrket theory, nd resource bsed theory re the theoreticl constructs underpinning this study. First, TCE provides bsis for the outsourcing decision nd its expected impct on firm vlue nd profitbility. Internl production minimizes the number of contrcts with mngers thus lowering trnsction costs (Cose, 1937). In contrst, mrket lloction of resources through outsourcing poses risks of incomplete contrcts nd opportunistic behvior inducing higher trnsction costs. Bsed on these ssumptions, Willimson's (1979) TCE identifies functionl chrcteristics of individul ctivities (sset specificity, uncertinty nd frequency) llowing mngers to minimize totl processing costs. Asset specificity indictes difficulty trnsferring to different use or user or being of little vlue outside of prticulr reltionship (Lohti, Brooks, & Krpfel, 1994). Uncertinty is the expected vrition in the demnd for ctivities or the inbility to monitor ctivities leding to control issues nd limittions on future plnning (Pilling, Crosby, & Jckson, 1994). While higher uncertinty is probble precursor to incresed monitoring costs, estblishing trust between prtners cn mitigte dditionl costs (Bhrdwj & Mtsuno, 2006). Frequency is the volume or rte of ctivity performnce. These ttributes s well s finding suitble prtner, enforcing incomplete contrcts nd providing incentives to minimize opportunistic behvior cuse firms to incur trnsction costs (Grossmn & Helpmn, 2005; Kls, 2008; Pilling et l., 1994). Theoreticlly nd empiriclly documented, mngers seeking to mximize profits consider production nd trnsction costs in the HR outsourcing decision (Ang & Strub, 1998; Grossmn & Helpmn, 2002), selecting the option with lower totl costs. Following the HRO decision, cpitl mrket theory nd resource bsed theory offer explntions for the resulting performnce effects. By publicly nnouncing HRO contrcts, mngers provide new informtion to the cpitl mrket concerning their operting strtegies tht the mrket should quickly incorporte into the stock price, linking HRO to finncil mrket performnce. Resource bsed theory views the firm s collection of productive resources nd cpbilities tht become the primry source of profit for firm (Grnt, 1991; Penrose, 1995). Engging in HRO llows mngers to focus resources on strtegic HR functions tht support the firm's core competencies nd overll performnce rther thn dministrtive or trnsctionl functions tht n externl provider cn perform t possibly lower cost Mrket response Cpitl mrket theory suggests tht chnges in stock returns round the of new informtion result from reduced informtion symmetry nd signling the mrket regrding expected future csh flows of the firm. While investors might interpret HRO s wekness in HR opertions, n HRO client voluntrily relesing HRO contrct informtion likely mens they expect investors to interpret the ction positively due to potentil incresed profits nd csh flows to the firm in the long term due to cost svings nd efficiency. While no reserch exists, to our knowledge, exmining the investor welth effect of HRO specificlly, Hyes, Hunton, nd Reck (2000) use event study methodology to exmine the impct of informtion systems (IS) outsourcing s on the mrket vlue of contrct-grnting firms (outsourcing client firms) nd find positive bnorml stock returns of smller firms nd service industry firms one dy following the outsourcing. Bsed upon the theoreticl frmework nd consistent with Hyes et l. (2000), the first hypothesis is stted in the lterntive form: H1. The cpitl mrket rection to client firms nnouncing HRO contrcts is positive. In determining internl or externl performnce of function, TCE uses the ttributes of sset specificity, uncertinty nd frequency (Willimson, 1979, 1991). Frequent ctivities nd those requiring specific ssets should be performed internlly becuse of the higher trnsction costs of externl coordintion (Widener & Selto, 1999), wheres ctivities not requiring specific ssets regrdless of frequency or tht re low in knowledge intensity, re optiml cndidtes for outsourcing (Vrdrjn, 2009). De Vit et l. (2010) find support for this theoreticl expecttion nd document tht buyers' sset specificity hs negtive impct on outsourcing reltionship performnce. Further, Lui, Wong, nd Liu (2009) find tht generting coopertive behvior rther thn reducing opportunistic behvior influences the reltion between sset specificity nd prtnership performnce. Although some HR services re unlikely cndidtes for outsourcing becuse of potentilly higher trnsction costs, economies of scle llow externl providers to perform services t lower costs thn client firms, resulting in improved profitbility. Incresed csh flows my follow outsourcing routine services or those not requiring specific ssets (e.g., pyroll nd employment or income verifiction) over non-routine ctivities. Therefore, the second hypothesis sttes: H2. The cpitl mrket response to client firms nnouncing outsourcing contrcts for HR services tht re routine nd do not require specific ssets is positive Operting performnce Outsourcingstrtegyeffectsshouldbeobservedinlongtermoperting performnce for two resons. First, ssuming mngement bses its outsourcing decision on the tenets of TCE with the gol of minimizing costs, overll performnce should improve. Second, the mrket response to n outsourcing is the result of investors' revised expecttions bout future csh flows bsed on newly vilble informtion. A positive mrket response to n suggests investors expect improved future operting performnce. Likewise, resource bsed theory suggests tht even n outsourcing decision resulting in negtive net welth effect enbles the firm to focus resources on strtegic ctivities indirectly leding to improved operting performnce. Although theory suggests expected improved operting performnce following HRO, empiricl survey reserch to dte reports mixed results on the reltion between outsourcing nd firm performnce. Gilley et l. (2004) employ survey methodology in firms outsourcing trining nd pyroll functions, nd find no reltion between mngers' perceived firm operting performnce nd HRO. Empiricl studies investigting profitbility effects of other types of outsourcing re inconclusive. Nmely, no direct effect of outsourcing peripherl nd core ctivities on firms' finncil nd non-finncil performnce (Gilley & Rsheed, 2000), negtive short term nd positive long term impct of outsourcing business services on firm performnce (Gorzig & Stephn, 2002), no effect of outsourcing business services on profits (Görg & Hnley, 2004) nd decline in profitbility in the yer of the, but improvement in subsequent yers (Jum'h & Wood, 2000). These contrdictions show tht notwithstnding the prevlence of outsourcing, there is no cler empiricl evidence tht firm operting performnce improves following HRO strtegy implementtion.

3 220 M.G. Butler, C.M. Cllhn / Journl of Business Reserch 67 (2014) Recognizing tht the outsourcing decision nd fctors determining operting performnce my be endogenous choices, the optimlity of the outsourcing decision is introduced s boundry condition. Leiblein, Reuer, nd Dlsce (2002) show tht technologicl performnce improvements following outsourcing re dependent upon the lignment of governnce decisions with contrctul hzrds; suggesting n influence of the optimlity of the outsourcing decision on firm performnce. Tken together with the inconclusive prior literture, this suggests the following hypothesis: H3. Operting performnce will decline following the outsourcing of humn resource services if the firm's outsourcing prticiption is not optiml. 3. Methods 3.1. Smple nd dt collection The smple includes HRO s publicly relesed between 1984 nd 2005 identified by serching Business Wire on Lexis-Nexis for keywords such s outsource, contrct, greement, humn resource, HR, nd HRO provider nmes (Hyes et l., 2000; Nicolou, 2004). The finl smples include 100 s for the mrket performnce tests nd 180 s for the operting performnce tests. In the operting performnce smple, the number of s by type of service rnges from 6 to 37 with HR informtion technology softwre or systems being the lest frequent nd benefits dministrtion nd income/employment verifiction the most frequent. Stffing, benefits dministrtion, income/employment verifiction, workforce mngement nd pyroll nd tx filing represent t lest 30 s ech. Lerning nd comprehensive HR services represent 16 nd 17 s respectively. The proportions re similr for the mrket performnce smple. With the exception of 1996, the smple includes less thn 10 s ech yer between 1984, the yer of the first identified, nd The 1999 BP contrct with Exult for ll trnsctionl nd dministrtive HR services signled chnge in the humn resource outsourcing mrket (Adler, 2003) which is evident by the increse in s in 1999 nd the yers following with between 14 nd 23 s ech yer from 2000 to 2005 (operting performnce smple). Requirements for the vrious sttisticl tests resulted in removing severl s from the smple s described below. Duplictes nd s by government or privte orgniztions were removed long with those for firms lcking required dt on Compustt nd CRSP. A group of 23 s relesed on one dy, referencing the sme provider, ws lso eliminted becuse this clustering implies commonlities nd cross-section correltion (Boehmer, Msumeci, & Poulsen, 1991), violtion of OLS regression. Event study methodology tests mrket response to outsourcing s by isolting n event or relese of new informtion to the mrket nd mesuring excess returns or the differences between ctul nd expected returns during n event period nd this imposes nother smple constrint. The expected returns re estimted from returns during n estimtion period prior to the event. To mitigte the possibility of other events contemporneous to the HRO s confounding the mrket response to outsourcing, the event study smple excludes s by firms with other press releses within 13 dy window round the HRO (10 dys before to 2 dys fter). Finlly, to reduce potentil noise introduced by subsequent s, the operting performnce nlyses include only the first HRO for ech firm. Ech outsourcing firm is mtched with control smple firm meeting the following criteri: 1) no outsourcing or Enterprise Resource Plnning (ERP) system s, 2) publicly trded securities, 3) finncil dt vilble on the nnul Compustt dtbse, 4) sme two-digit SIC clssifiction s smple firm, nd 5) sles within 30% of those for the mtched outsourcing firm in the yer preceding the HRO Control vribles Both mrket nd operting performnce nlyses incorporte control vribles representing other fctors influencing overll firm performnce. Following previous literture, included re firm size mesured s the nturl log of sles (Alessndri & Khn, 2006; Hyes et l., 2000; Singh, Nejdmlyeri, & Mthur, 2007) nd industry cptured s dichotomous vrible identifying service industry firms or those with SIC clssifictions of 5000 or higher. Service firms rely on humn resources to perform their core competencies nd therefore HRO is likely to hve greter impct on these firms thn mnufcturing firms tht might rely more hevily on utomtion. To control for prior performnce which is relted to mrket performnce (Alessndri & Khn, 2006), the operting performnce vrible is lgged one yer. Growth opportunity, mesured s book vlue per shre divided by mrket price per shre (book-to-mrket) is likely to be relted to operting performnce (Sid, HssbElnby, & Wier, 2003; Singh et l., 2007). Advertising intensity defined s dvertising expense divided by sles, cpitl intensity clculted by dividing totl ssets by sles (Greer, Irelnd, & Wingender, 2001), nd R&D intensity mesured s R&D expense divided by sles re included to control for the firm's expected operting performnce chnges resulting from incresed dvertising, strtegic employment of ssets nd reserch nd development efforts (Sshi & Stern, 1995). Finlly, leverge mesured s long term debt divided by totl ssets controls for the role high debt cn ply in hindering firm's bility to improve overll operting performnce (Singh et l., 2007). Descriptive sttistics of these vribles re presented in Tble Estimtion methods Mrket performnce H1 nd H2 Ptell's (1976) stndrd event study methodology is employed to exmine the short-term mrket response to HRO s similr to Hyes et l. (2000), Greer et l. (2001) nd Mrciukityte, Roskelley, nd Wng (2009). Returns re estimted over 200 dy window strting 260 dys before the dte using the mrket model, nd consistent with prior literture, the vlueweighted mrket return which more ccurtely cptures the totl welth effects experienced by investors (Chen & Zhng, 2007; Fm, 1998). Abnorml returns re clculted for ech firm dy in the event period s the difference between the ctul returns nd the expected returns. Cumultive bnorml returns re the sum of the bnorml returns over two-dy event window including the dy of nd the dy fter the (Greer et l., 2001; Mrciukityte et l., 2009). Cumultive bnorml stock returns significntly different from zero represent mrket rection to new informtion. Regression nlysis is used to determine the reltion between types of HR services contrcted nd themrketresponsemesuredsthe2-dycumultivebnormlreturn nd to investigte the drivers of the mrket response. Types of HR services outsourced re identified by dichotomous vribles with vlue of one for firms contrcting ech of the following HR services: stffing, benefits dministrtion, income nd employment verifiction, workforce mngement nd internl communiction, pyroll processing, lerning nd trining, informtion technology, nd comprehensive HR services. A vlue of zero indictes firm does not contrct the service Operting performnce H3 Regression nlysis is lso used to test the expected long term operting performnce, mitigting the risk of inccurtely cpturing

4 M.G. Butler, C.M. Cllhn / Journl of Business Reserch 67 (2014) Tble 1 Descriptive sttistics nd correltions of operting performnce vribles,b. Men S.D Return on ssets Operting return on ssets Growth opportunity Size Advertising intensity Cpitl intensity R&D intensity Leverge b n=360. Correltions greter thn.13 (bsolute vlue) re significnt t pb.10. Vribles re mesured in yer of outsourcing. the economic impct of HRO when relying only on short term mrket response (Oler, Hrrison, & Allen, 2008). Ech requires observtions before nd fter the for both the outsourcing firm nd the control firm. Robust stndrd errors re used to correct for non-normlity nd heteroskedsticity. The initil nlysis of the long-term effect of HRO tests the chnge in operting performnce before the to one, two, nd three yers fter using mtched control smple of firms. The overll operting performnce metrics reported re return on ssets (ROA) mesured s income before extrordinry items-vilble for common, divided by verge totl ssets (Hunton, Lippincott, & Reck, 2003) nd operting return on ssets (OROA) mesured s operting income fter deprecition divided by verge totl ssets (Nicolou, 2004). These mesures nd time lg re commonly used in cdemic performnce reserch (e.g. Mrciukityte et l., 2009; McDonld, Khnn, & Westphl, 2008; Sid et l., 2003; Singh et l., 2007). The dt used to clculte these vribles re from the Compustt dtbse. The independent vrible is n interction term (Client Yer) composed of client, dichotomous vrible distinguishing outsourcing firms from control smple firms nd yer, dichotomous vrible identifying individully the three yers fter the outsourcing. A significnt coefficient indictes chnge in operting performnce of outsourcing firms reltive to the control smple in the yers following the HRO. The possibility tht the outsourcing decision nd operting performnce explntory vribles re jointly determined rises concerns regrding endogeneity nd bised estimtors (Chenhll & Moers, 2007). If ll firms re operting ccording to TCE expecttions (under equilibrium conditions), their outsourcing decisions will be optiml nd HRO will hve no effect on performnce (Chenhll & Moers, 2007; Demsetz & Lehn, 1985; Ittner, Lnen, & Lrcker, 2002; Lrcker & Rusticus, 2007). Following Ittner et l. (2002), Sid et l. (2003), nd Lrcker, Richrdson, nd Tun (2007), dditionl residul nlysis is used to determine the extent to which firms in the cross-section re temporrily off-equilibrium (Chenhll & Moers, 2007). To determine the optimlity of HRO, demnd uncertinty nd promotion opportunity which re ssocited with relince on HR outsourcing (Kls et l., 2001), re used s instrumentl vribles. The proxy for HR stff member promotion opportunities clculted s the rtio of the highest HR executive slry to the verge slry of the top five executives is not nlyzed becuse of insufficient dt. Using demnd uncertinty s n instrumentl vrible, the Durbin Wu Husmn test does not indicte endogeneity. To ddress optimlity of HRO, however, logistic regression including demnd uncertinty predicts the probbility of outsourcing HR services ccording to TCE, with the residuls mesuring the extent to which firms' outsourcing decisions re not optiml. Finlly, regression nlysis tests the reltion between the operting performnce vribles nd the logistic regression residuls controlling for the optimlity of the outsourcing decision. Positive residuls of the logistic regression indicte prticiption in HRO with predicted probbility of prticiption of less thn one. The coefficient of this vrible is expected to be negtive, s performnce should decline if outsourcing is not the optiml decision. Negtive residuls indicte non-prticiption in HRO with predicted probbility of prticiption greter thn zero (Ittner et l., 2002). The coefficient of this vrible is expected to be positive, s performnce should lso decline if firms do not outsource when predictedtodoso. 4. Results 4.1. Mrket performnce Results supporting H1 re reported in Tble 2 nd document significnt positive men bnorml return the dy fter the (+1) (AR=0.22%, pb.10) nd reversl five dys fter the (+5) with significnt negtive men bnorml return (AR= 0.29%, pb.10). The bnorml returns re consistent with previous IS outsourcing event study reserch (Hyes et l., 2000). The cumultive bnorml return (CAR) over two dy event window (0, +1) is sttisticlly nd economiclly significnt (CAR= 0.43%, pb.05) with men bnorml gin on equity of $87,226,650 (pb.01) winsorized t 2% to mitigte the effect of outliers. The bnorml gin on equity is the mrket vlue of equity fifteen dys prior to the outsourcing multiplied by the bnorml return the dy following the. The sttisticl tests re bsed on the stndrdized prediction error (Ptell, 1976) nd stndrdized cross-sectionl method (Boehmer et l., 1991; Cown, 2005). Tble 2, Pnel D presents the cross section regression nlysis of the two-dy (0, +1) CAR nd the types of HR services outsourced. The model, estimted using robust stndrd errors, hs significnt explntory power (F vlue=2.81; pb.01; R 2 =0.28). The coefficients on four of the trnsctionl outsourced HR services re positive nd significnt: benefits dministrtion (pb.10); income nd employment verifiction (pb.05); lerning (pb.05) nd informtion technology (p b.01), supporting H2 tht outsourced HR service type influences mrket expecttions. Outsourcing these prticulr HR functions ppers to positively influence mrket prticipnts' expecttions of incresed csh flows. Additionlly, consistent with previous reserch, the smple of service industry firms experiences differentil positive mrket effect upon nnouncing HRO contrcts (pb.01), (Hyes et l., 2000; Kls et l., 2001) suggesting tht the mrket vlues n HRO strtegy involving dministrtive HR functions when the mngement of humn cpitl is essentil to firm gols, s it is with service firms. Control vribles indicting new, renewed or extended HRO reltionships yield insignificnt results signifying tht these conditions do not chnge mrket expecttions of future csh flows Operting performnce Preliminry operting performnce regression results re presented in Tble 3. In Pnel A, the significnt nd positive coefficient on Client Yer in yer two (β 3 =0.04, pb.10) indictes tht two yers following the, ROA for outsourcing firms is significntly

5 222 M.G. Butler, C.M. Cllhn / Journl of Business Reserch 67 (2014) Tble 2 Mrket rection to humn resource outsourcing s. Pnel A. Men bnorml returns Event dy Men bnorml returns Ptell's (1976) z-sttistic ( 5) 0.03% ( 4) 0.45% ( 3) 0.66% ( 2) 0.03% ( 1) 0.41% (0) 0.21% (+1) 0.22% (+2) 0.15% (+3) 0.08% (+4) 0.06% (+5) 0.29% Pnel B. Men cumultive bnorml returns (CARs) Event window Men cumultive bnorml returns Ptell's (1976) z-sttistic ( 5, 1) 1.47% (0, +1) 0.43% Boehmer et l.'s (1991) z-sttistic Boehmer et l.'s (1991) z-sttistic Pnel C. Men bnorml gin on equity of client firms on dy t+1 Men t-sttistic Abnorml gin on equity $87,226, Pnel D. Regression Anlysis of 2-dy CARs nd type of humn resource service outsourced b Independent vribles CAR (0, +1) Stffing 0.01 (0.01) Benefits dministrtion 0.02 (0.01) Income nd employment 0.03 (0.01) verifiction Workforce mngement 0.01 (0.01) Pyroll 0.01 (0.01) Lerning 0.03 (0.02) Informtion technology 0.07 (0.03) End-to-end 0.01 (0.02) Size 0.00 (0.00) Industry 0.02 (0.01) Constnt 0.03 (0.02) F vlue 2.81 R N 92 b n=100; pb.10, pb.05, pb.01. Robust stndrd errors re in prentheses. different from ROA before outsourcing nd from the mtched control group performnce before nd fter the. In Pnel B, the significnt negtive coefficient on Client Yer in yer one (β 3 = 0.03, pb.05) indictes decline in OROA immeditely fter the outsourcing suggesting dely in operting performnce improvement, perhps due to the cost of implementtion or time needed to relize the full finncil impct of HRO (Greer et l., 2001). The results of the logistic regression presented in Tble 4 show tht for this smple, firms with lower finncil performnce unpredictbility (higher finncil predictbility) nd higher levels of R&D investment re more likely to outsource HR services. Likewise, firms with low growth opportunity nd low debt levels, s well s lrger firms re lso more likely to outsource HR services. The model is significnt (Chi-squre=50.63; pb.01) nd the Pseudo R 2 (0.11) is consistent with tht reported by Ittner et l. (2002). The residul nlysis regression results presented in Tble 5 support H3 nd re compelling for the operting performnce results. ROA declines in yer three for firms whose HRO prticiption does not mtch predicted probbility s shown by the positive nd Tble 3 Operting performnce nlysis. negtive residul coefficients (β 1 = 0.04, pb.05; β 2 =0.01, pb.10). For firms outsourcing HR with low predicted probbility of doing so, OROA lso declines (β 1 = 0.04, pb.10). These results support H3 tht outsourcing HR services does, in generl, hve negtive long term effect on operting performnce if outsourcing prticiption is not optiml. Smple firms operting outside of their optiml outsourcing condition bsed on residul nlysis experience decline in operting performnce. This suggests cler linkge between operting performnce nd outsourcing decision optimlity. 5. Discussion One yer fter outsourcing Two yers fter outsourcing Three yers fter outsourcing Return on ssets Outsourcing client 0.00 (0.02) 0.04 (0.02) 0.00 (0.02) firm yer fter Outsourcing client 0.01 (0.01) 0.01 (0.01) 0.02 (0.02) firm Yer fter 0.02 (0.01) 0.01 (0.01) 0.01 (0.01) Prior yer 0.52 (0.10) 0.42 (0.03) 0.57 (0.15) performnce Growth opportunity 0.00 (0.00) 0.00 (0.00) 0.01 (0.00) Size 0.02 (0.01) 0.00 (0.00) 0.00 (0.00) Advertising intensity 0.15 (0.16) 0.52 (0.37) 0.14 (0.15) Cpitl intensity 0.00 (0.00) 0.00 (0.00) 0.00 (0.00) R&D intensity 0.73 (0.47) 0.22 (0.12) 0.18 (0.10) Leverge 0.20 (0.07) 0.07 (0.03) 0.06 (0.03) Constnt 0.05 (0.04) 0.06 (0.04) 0.05 (0.03) N F R Operting return on ssets Outsourcing client 0.03 (0.01) 0.01 (0.01) 0.01 (0.01) firm yer fter Outsourcing client 0.02 (0.01) 0.01 (0.01) 0.02 (0.01) firm Yer fter 0.02 (0.01) 0.01 (0.01) 0.01 (0.01) Prior yer 0.95 (0.10) 0.83 (0.08) 0.74 (0.12) performnce Growth opportunity 0.00 (0.00) 0.00 (0.00) 0.00 (0.00) Size 0.00 (0.00) 0.00 (0.00) 0.00 (0.00) Advertising intensity 0.02 (0.11) 0.32 (0.31) 0.27 (0.18) Cpitl intensity 0.00 (0.00) 0.00 (0.00) 0.00 (0.00) R&D intensity 0.41 (0.24) 0.11 (0.08) 0.05 (0.09) Leverge 0.07 (0.03) 0.02 (0.04) 0.01 (0.02) Constnt 0.02 (0.03) 0.03 (0.02) 0.06 (0.03) N R F pb.10, pb.05, pb.01; robust stndrd errors re in prentheses. In contrst to the vrying results reported by existing outsourcing reserch, nd the criticl strtegic influence of HR, this nlysis uniquely documents the short nd long term welth effects ssocited with HRO. Bsed on trnsction cost economics, resource bsed theory nd cpitl mrket theory, the smple of firms publicly relesing HRO s nd the mtched control smple of non-outsourcing firms provide evidence of positive mrket welth effects resulting from dopting humn resource outsourcing strtegy nd of negtive operting performnce when the outsourcing decision is not optiml. The results support H1 with significnt positive mrket response fter the outsourcing equting to n economiclly significnt men bnorml gin on equity the dy following the

6 M.G. Butler, C.M. Cllhn / Journl of Business Reserch 67 (2014) Tble 4 Logistic regression prediction of humn resource outsourcing prticiption. Coefficient Chi-squre Demnd uncertinty Growth opportunity Size Advertising intensity Cpitl intensity R&D intensity Leverge Intercept Pseudo R Chi-squre N 353 pb.10, pb.05, pb.01. of over $87 million. Additionlly, the trnsctionl HR functions (benefits dministrtion, income nd employment verifiction, lerning or trining nd HR informtion technology) re differentilly relted to the positive mrket response (H2) indicting n expecttion of positive csh flows resulting from outsourcing these services. Consistent with Hyes et l.'s (2000) study on IS outsourcing, the results show tht for this smple, service industry firms experience positive mrket response. This suggests tht the cpitl mrket my view fvorbly firms tht rely gretly on humn cpitl nd outsource their trnsctionl HR functions. In keeping with the cpitl mrket theory incresed csh flow expecttions, this study documents decline in OROA in the short term, but improved ROA two yers fter the. An importnt result relies on residul nlysis which provides mens to evlute the optimlity of the outsourcing decision, nd controls for potentil endogeneity concerns. Firms whose HRO prticiption is suboptiml experience decline in ROA three yers fter the (H3). Tble 5 Residul nlysis. Return on ssets Operting return on ssets Pnel A: residul nlysis for three yers following the,b Positive residul 0.02 (0.01) 0.01 (0.01) Negtive residul 0.01 (0.01) 0.01 (0.01) Prior period performnce 0.58 (0.12) 0.76 (0.10) Growth opportunity 0.00 (0.00) 0.00 (0.00) Size 0.00 (0.00) 0.00 (0.00) Advertising intensity 0.06 (0.25) 0.04 (0.25) Cpcity intensity 0.00 (0.00) 0.00 (0.00) R&D intensity 0.09 (0.08) 0.07 (0.08) Leverge 0.06 (0.02) 0.02 (0.02) Intercept 0.06 (0.02) 0.03 (0.03) F vlue R N Pnel B: residul nlysis in yer 3 following the Positive residul (0.02) 0.04 (0.02) Negtive residul 0.01 (0.01) 0.01 (0.01) Prior period performnce 0.41 (0.06) 0.61 (0.09) Growth opportunity 0.01 (0.01) 0.01 (0.00) Size 0.00 (0.00) 0.00 (0.00) Advertising intensity 0.46 (0.16) 0.48 (0.18) Cpcity intensity 0.00 (0.00) 0.00 (0.00) R&D intensity 0.13 (0.07) 0.07 (0.08) Leverge 0.03 (0.05) 0.01 (0.03) Intercept 0.08 (0.04) 0.09 (0.04) F vlue R N pb.10, pb.05, pb.01; robust stndrd errors re in prentheses. b The positive residul coefficient is expected to be negtive indicting tht HRO prticipnts with low predicted probbility of prticiption re expected to chieve lower performnce. Unique to outsourcing literture, this study provides n initil fory into the use of rchivl finncil dt to more precisely quntify the reltion between outsourcing nd performnce. This study documents the short term mrket effect, the significnt economic impct nd the long term operting effects of outsourcing dministrtive HR services. Given the direct nd indirect importnce of humn resource services to overll firm performnce, outsourcing these functions cn hve positive nd negtive consequences for the firm, providing fertile ground for further investigting the outsourcing phenomenon. Finlly, this study's results offer criticl informtion for mngers considering cost cutting strtegies, efficiency improvements, or strtegic focus on the firms' core ctivities. While, some mngers re hesitnt to voluntrily disclose informtion pertining to internl opertions, the results suggest firms cn experience benefits by doing so. The findings of declining long term operting performnce when the outsourcing decision is suboptiml underscore the cre nd diligence required to mke vlue enhncing outsourcing decisions. 6. Limittions nd venues for future reserch The results of this study re subject to some limittions. This pper focuses only on the client or outsourcing firm, nd does not ddress the provider or the provider client reltionship. The smple is limited to publicly trded firms with publicly vilble HRO informtion nd excludes privte, governmentl nd nonprofit orgniztions. While this study is restricted to HRO, criticl component of the outsourcing industry, similr nlyses re needed for mnufcturing, finncil services nd customer service outsourcing, for exmple. Likewise, controlling for the effectiveness of HR mngement by outsourcing firms through ERP implementtion is potentil extension of this reserch. The focus of this study on overll performnce is n initil step in estblishing the vlue proposition of HRO. Further reserch is needed to estblish the specific components of this overll effect. Acknowledgments We thnk the AICPA nd the KPMG Foundtion for finncil support. We benefitted from comments by 2007 Americn Accounting Assocition Annul Meeting nd University of South Florid workshop prticipnts, our collegues: Rod Smith, Kren Sedtole, Nthn Sturt, nd Jckie Reck, nd n nonymous reviewer. We re grteful for reserch ssistnce from Suznn Hicks, Dniel Bzley, Albert Lr nd Michelle Sltsmn. References Abowd, J. M., Milkovich, G. T., & Hnnon, J. M. (1990). The effects of humn resource mngement decisions on shreholder vlue. Industril & Lbor Reltions Review, 43, 203S 236S. Adler, P. S. (2003). Mking the HR outsourcing decision. MIT Slon Mngement Review, 45, Alessndri, T. M., & Khn, R. H. (2006). Mrket performnce nd devince from industry norms: (Mis)lignment of orgniztionl risk nd industry risk. Journl of Business Reserch, 59, Ang, S., & Strub, D. (1998). Production nd trnsction economies nd IS outsourcing: A study of the U.S. bnking industry. MIS Qurterly, 22, Becker, B., Huselid, M. (2003). Mesuring HR? HR Mgzine, 48, Bendorf, M., Brge, B. N., & Grzino, C. d. M. (2005). Ask FERF bout... outsourcing humn-resource services. Finncil Executive, 60. Bhrdwj, N., & Mtsuno, K. (2006). Investigting the ntecedents nd outcomes of customer firm trnsction cost svings in supply chin reltionship. Journl of Business Reserch, 59, Boehmer, E., Msumeci, J., & Poulsen, A. B. (1991). Event-study methodology under conditions of event-induced vrince. Journl of Finncil Economics, 30, Chen, P. F., & Zhng, G. (2007). Segment profitbility, misvlution, nd corporte divestment. The Accounting Review, 82, Chenhll, R. H., & Moers, F. (2007). The issue of endogeneity within theory-bsed, quntittive mngement ccounting reserch. The Europen Accounting Review, 16, Cose, R. H. (1937). The nture of the firm. Economic, 4, Cown, A. R. (2005). Eventus softwre, version 8.0. : Cown Reserch LC.

7 224 M.G. Butler, C.M. Cllhn / Journl of Business Reserch 67 (2014) De Vit, G., Teky, A., & Wng, C. L. (2010). Asset specificity's impct on outsourcing reltionship performnce: A disggregted nlysis by buyer supplier sset specificity dimensions. Journl of Business Reserch, 63, Delmotte, J., & Sels, L. (2008). HR outsourcing: Thret or opportunity? Personnel Review, 37, Demsetz, H., & Lehn, K. (1985). The structure of corporte ownership: Cuses nd consequences. Journl of Politicl Economy, 93, Dickmnn, M., & Tyson, S. (2005). Outsourcing pyroll: Beyond trnsction-cost economics. Personnel Review, 34( ), Fm, E. F. (1998). Mrket efficiency, long-term returns, nd behviorl finnce. Journl of Finncil Economics, 49, Fisher, S. L., Wssermn, M. E., Wolf, P. P., & Wers, K. H. (2008). Humn resource issues in outsourcing: Integrting reserch nd prctice. Humn Resource Mngement, 47, Giney, T. W., Kls, B. S., & Moore, D. (2002). Outsourcing the trining function: Results from the field. Humn Resource Plnning, 25, Gilley, K., Greer, C., & Rsheed, A. (2004). Humn resource outsourcing nd orgniztionl performnce in mnufcturing firms. Journl of Business Reserch, 57, Gilley, K., & Rsheed, A. (2000). Mking more by doing less: An nlysis of outsourcing nd its effects on firm performnce. Journl of Mngement, 26, Görg, H., & Hnley, A. (2004). Does outsourcing increse profitbility? Economic nd Socil Review, 35, Gorzig, B., & Stephn, A. (2002). Outsourcing nd firm-level performnce. : GermnInstitute for Economic Reserch Discussion Ppers 309 (October). Grnt, R. M. (1991). The resource-bsed theory of competitive dvntge: Implictions for strtegy formultion. Cliforni Mngement Review, 33, Greer, C. R., Irelnd, T. C., & Wingender, J. R. (2001). Contrrin humn resource investments nd finncil performnce fter economic downturns. Journl of Business Reserch, 52, Grossmn, G. M., & Helpmn, E. (2002). Integrtion versus outsourcing in industry equilibrium. Qurterly Journl of Economics, Grossmn, G. M., & Helpmn, E. (2005). Outsourcing in globl economy. The Review of Economic Studies, 72, Hnsen, F. (2008). A lofty idel. Workforce Mngement, 87(31 32), Hyes, D. C., Hunton, J. E., & Reck, J. L. (2000). Informtion systems outsourcing s: Investigting the impct on the mrket vlue of contrct-grnting firms. Journl of Informtion Systems, 14, Hunton, J. E., Lippincott, B., & Reck, J. L. (2003). Enterprise resource plnning systems: Compring firm performnce of dopters nd nondopters. Interntionl Journl of Accounting Informtion Systems, 4, Ittner, C. D., Lnen, W. N., & Lrcker, D. F. (2002). The ssocition between ctivity-bsed costing nd mnufcturing performnce. Journl of Accounting Reserch, 40, Jing, B., & Qureshi, A. (2006). Reserch on outsourcing results: Current literture nd future opportunities. Mngement Decision, 44, Jum'h, A. H., & Wood, D. (2000). Outsourcing implictions on compnies' profitbility nd liquidity: A smple of UK compnies. Work Study, 49, Kessler, I., Coyle-Shpiro, J., & Purcell, J. (1999). Outsourcing nd the employee perspective. Humn Resource Mngement Journl, 9, Kls, B. S. (2008). Outsourcing nd the HR function: An exmintion of trends nd developments within North Americn firms. Interntionl Journl of Humn Resource Mngement, 19, Kls, B. S., McClendon, J. A., & Giney, T. W. (1999). HR outsourcing nd its impct: The role of trnsction costs. Personnel Psychology, 52, Kls, B. S., McClendon, J. A., & Giney, T. W. (2001). Outsourcing HR: The impct of orgniztionl chrcteristics. Humn Resource Mngement, 40(2), Kosnik, T., Wong-MingJi, D. J., & Hoover, K. (2006). Outsourcing vs insourcing in the humn resource supply chin: A comprison of five generic models. Personnel Review, 35, Li, W. -H., & Chng, P. -L. (2010). Corporte motivtion nd performnce in R&D llinces. Journl of Business Reserch, 63, Lrcker, D. F., Richrdson, S. A., & Tun, I. (2007). Corporte governnce, ccounting outcomes, nd orgniztionl performnce. The Accounting Review, 82, Lrcker, D. F., & Rusticus, T. O. (2007). Endogeneity nd empiricl ccounting reserch. The Europen Accounting Review, 16, Lee, C. -W. (2007). Strtegic llinces influence on smll nd medium firm performnce. Journl of Business Reserch, 60, Leiblein, M. J., Reuer, J. J., & Dlsce, F. (2002). Do mke or buy decisions mtter? The influence of orgniztionl governnce on technologicl performnce. Strtegic Mngement Journl, 23, Lievens, F., & Corte, W. D. (2008). Development nd test of model of externl orgniztionl commitment in humn resources outsourcing. Humn Resource Mngement, 47, Lilly, J. D., Gry, D. A., & Virick, M. (2005). Outsourcing the humn resource function: Environmentl nd orgniztionl chrcteristics tht ffect HR performnce. The Journl of Business Strtegy, 22, Lohti, R., Brooks, C. M., & Krpfel, R. E. (1994). Wht constitutes trnsction-specific sset? An exmintion of the dimensions nd types. Journl of Business Reserch, 30, Lui, S. S., Wong, Y. -Y., & Liu, W. (2009). Asset specificity roles in interfirm coopertion: Reducing opportunistic behvior or incresing coopertive behvior? Journl of Business Reserch, 62, Mrciukityte, D., Roskelley, K., & Wng, H. (2009). Strtegic llinces by finncil services firms. Journl of Business Reserch, 62, Mrquez, J. (2007). Reducing costs sore subject t HRO meeting. Workforce Mngement, 7 8. McDonld, M. L., Khnn, P., & Westphl, J. D. (2008). Getting them to think outside the circle: Corporte governnce, CEOs' externl dvice networks, nd firm performnce. Acdemy of Mngement Journl, 51, Nicolou, A. I. (2004). Firm performnce effects in reltion to the implementtion nd use of enterprise resource plnning systems. Journl of Informtion Systems, 18, Oler, D. K., Hrrison, J. S., & Allen, M. R. (2008). The dnger of misinterpreting short-window event study findings in strtegic mngement reserch: An empiricl illustrtion using horizontl cquisitions. Strtegic Orgniztion, 6, Oshim, M., Ko, T., & Tower, J. (2005). Achieving post-outsourcing success. Humn Resource Plnning, 25, Ptell, J. M. (1976). Corporte forecsts of ernings per shre nd stock price behvior: Empiricl test. Journl of Accounting Reserch, 14, Penrose, E. (1995). The theory of the growth of the firm. New York: Oxford University Press. Pilling, B. K., Crosby, L. A., & Jckson, D. W., Jr. (1994). Reltionl bonds in industril exchnge: An experimentl test of the trnsction cost economic frmework. Journl of Business Reserch, 30, Sid, A. A., HssbElnby, H. R., & Wier, B. (2003). An empiricl investigtion of the performnce consequences of nonfinncil mesures. Journl of Mngement Accounting Reserch, 15, Sshi, C. M., & Stern, L. W. (1995). Product differentition nd mrket performnce in producer goods industries. Journl of Business Reserch, 33, Shen, J. (2005). Humn resource outsourcing: Journl of Orgnistionl Trnsformtion nd Socil Chnge, 2, Singh, M., Nejdmlyeri, A., & Mthur, I. (2007). Performnce impct of business group ffilition: An nlysis of the diversifiction-performnce link in developing economy. Journl of Business Reserch, 60, Vrdrjn, R. (2009). Outsourcing: Think more expnsively. Journl of Business Reserch, 62, Widener, S. K., & Selto, F. H. (1999). Mngement control systems nd boundries of the firm: Why do firms outsource internl uditing ctivities? Journl of Mngement Accounting Reserch, 11, Willimson, O. E. (1979). Trnsction-cost economics: The governnce of contrctul reltions. Journl of Lw nd Economics, 22, Willimson, O. E. (1991). Comprtive economic orgniztion: The nlysis of discrete structurl lterntives. Administrtive Science Qurterly, 36,