Contagion and Comovement in Technology Partnerships

Abstract

We find that the stock market valuations of firms reflect information on their technology partnerships and that market performance and fundamentals of firms comove with peers engendered by these partnerships. Using granular, proprietary data on 22,040 technology outsourcing contracts implemented between 1989 and 2013, we document that the implementation of a strategic technology partnership situates the focal client and vendor in a larger community of clients and vendors with interdependent risks and payoffs that results in performance comovement within these communities. We further find that the portfolio of contracts of the focal firm, notably, compensation modes, moderates their comovement with the community. Fixed price [variable price] contracts, where the vendor [client] bears the risk of cost overruns and is the residual claimant of ex-post surplus, insulate the client [vendor] from performance shocks. Our results show that the stock market values technology partnerships and recognizes peer groups engendered by these partnerships that are not reflected in standard industry groupings. The results additionally support the potential shift in competition from between firms to between value networks.

Keywords: technology partnership, outsourcing, network, firm performance, contagion