Impact on Firm Liquidity Arising from Outsourcing Decisions as Evidenced by Off-Balance-Sheet Disclosures

Based on transaction-cost and resource-based theories (and other approaches), there is an extensive literature on the range of factors that are viewed as relevant to the outsourcing decision. However, this study’s investigations revealed a gap in the literature because the impact of outsourcing on liquidity has not been fully analysed. The study addressed this issue through an empirical investigation that identified a source of information on the amount of contractual purchase obligations arising from the outsourcing decision and demonstrated their significant impact on company liquidity. The data source was the United States Securities and Exchange Commission database that included each company’s annual return incorporating off-balance-sheet Sarbanes Oxley mandated disclosures. The study found that these disclosures as contractual purchase obligations can be used as a proxy for outsourcing activities and provided details of resulting future cash flows. The Wilcoxon signed-rank test was conducted to test for significant differences at the 5% confidence level between the results of three metrics before and after the inclusion of short-term purchase obligations. A null hypothesis of no difference between liquidity ratio mean ranks before and after the addition of purchase obligations <1 year was assumed. Analysis and testing revealed statistically significant differences (p = 0.012) between three liquidity metrics calculated using standard financial statement data and those that were adjusted for the off-balance-sheet contractual purchase obligation disclosures.