Outsourcing Flexibility under Financial Constraints Jongmoo Jay Choi 1 , Ming Ju 2 , Lenos Trigeorgis 3 , and Xiaotian Tina Zhang 4 February 1, 2019 ABSTRACT We develop the notion of outsourcing as providing flexibility overcoming financial constraints and provide empirical evidence concerning the role of flexibility on the likelihood and value of outsourcing. The results show that the likelihood of outsourcing is higher, the greater the firm’s financial constraints before outsourcing (or the less its financial flexibility). The effect of financial flexibility on the probability of outsourcing is greater, the lower the ex-ante operational flexibility, implying substitutability between financial and operational flexibility. We also find that the market valuation of outsourcing announcements is positive due to net flexibility gains and that such ex post valuation is positively related to ex ante financial constraints. Our findings are consistent with the notion that outsourcing is a vehicle for flexibility acquisition and that financial constraints play a prominent role in such acquisition. JEL classification: G14; G34; F23 Keywords: Outsourcing, real options, financial constraints, operational flexibility, boundaries of the firm 1 Laura H. Carnell Professor of Finance and Professor of International Business and Strategy, Fox School of Business, Temple University, Philadelphia, PA 19122. Phone: +1 215-204-5084. E-mail: jjchoi@temple.edu. 2 Assistant Professor of Finance, College of Business, Louisiana Tech University, Ruston, LA 71272. Phone: +1 318- 257-3863. E-mail: mingju@latech.edu. 3 Bank of Cyprus Chair Professor of Finance, University of Cyprus, and Professor of Finance, King’s College London, London, U.K. Phone: +44 (0)20 7848 3770. E-mail: lenos.trigeorgis@kcl.ac.uk. 4 Associate Professor of Finance, Saint Mary’s College of California, Moraga, CA 94575. Phone: +1 925-631-8694. E-mail: xz4@stmarys-ca.edu.