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

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Abstract

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.

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Notes

  1. Only companies categorised as a ‘Small Business Issuer’ are exempt from this requirement. Generally, this is defined as a company with annual sales less than $25 million. A full definition is available at U.S. Securities and Exchange Commission (2003, Note 115).

  2. The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) have both published revised documents on the topic of lease contracts. IFRS 16 Leases (International Accounting Standards Board 2016) is effective for annual reporting periods commencing after January 2019. The FASB published an Accounting Standards Update (ASU No 2016 Topic 942) that is effective for fiscal years beginning after December 15, 2018 for public companies and is effective one year later for all other organisations (Financial Accounting Standards Board 2016). Although it is difficult at this stage to assess the full impact of their implementation, the aim of both standards is to improve the financial reporting of leasing. This should lead to the recognition of material contractual obligations that were previously off-balance sheet items.

  3. The relative change for both liquidity ratios as measured by the Index of Comparability was practically identical. In the interests of parsimony, this study focused on one set of results for the CFO ratio in this section.

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Authors and Affiliations

  1. Department of Accounting and MIS, Gulf University of Science and Technology, West Mishref, Kuwait

    Garvan Whelan, Vincent O’Connell & Naser Abu Ghazalah

  2. School of Business, National College of Ireland, International Financial Services Centre, Dublin, Ireland

    Paul Hanly

  3. Cork University Business School, University College Cork, Cork, Ireland

    Vincent O’Connell

  4. Department of Economic Theories, Faculty of Economics and Management, Czech University of Life Sciences, Prague, Czech Republic

    Oldřich Ludwig Dittrich

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  1. Garvan Whelan
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  2. Paul Hanly
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  3. Vincent O’Connell
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  4. Oldřich Ludwig Dittrich
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  5. Naser Abu Ghazalah
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Correspondence to Garvan Whelan.

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Whelan, G., Hanly, P., O’Connell, V. et al. Impact on Firm Liquidity Arising from Outsourcing Decisions as Evidenced by Off-Balance-Sheet Disclosures. Int Adv Econ Res 27, 17–27 (2021). https://doi.org/10.1007/s11294-021-09814-7

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