How Do Investors Value IT? An Empirical Investigation of the Value Relevance of IT Capability and IT Spending Across Industries

Abstract

Drawing on the resource-based theory of the firm and using Ohlson’s (1995) residual income valuation framework, this paper investigates the relationships between IT capability and IT spending, and market value. We also assess whether these relationships differ based on the industry type (i.e., high-tech). Using publicly available ratings, and after controlling for firm-specific determinants as well as industry fixed-effects, we find that IT capability is value relevant (i.e., the stock market values of firms with superior IT capability are both economically and statistically higher than the values of a control sample), whereas the level of IT spending did not explain variation in market values. The results are shown to hold using two unique archival data sets representing the immediate pre-Internet (1992–1994) and the post-Internet commercialization (1999–2006) eras and are remarkably robust to variations in the control sample, sampling method, and model specifications. Consistent with these results, we also find that IT capability is associated with actual future earnings. Additionally, we find that IT capability is more value relevant for firms in high-tech industries in the post-Internet period. Overall, our analysis suggests that, on average, investors reward firms with superior IT capabilities through higher market values, consistent with the notion that IT capability contributes to the firm’s future prospects (the size and risk associated with the firm’s future income stream), and that market performance differential from IT rests less on IT spending, per se, and more on the firm’s IT capability. The implications of these findings for practice and research are discussed.

Business value of IT capabilities: effects on processes and firm performance in a developing country

“…Regarding firm size, we found that structural trajectories (ITC  PPL) are similar between larger and smaller firms , although this differs from studies that indicate a positive association (K. Kim, Xiang, & Lee, 2009;Muhanna & Stoel, 2010). These results enable us to understand that isolated amount of resources and standardized IT [captured by size] are not the elements that provide competitive differential (Thouin et al, 2009;Ting-Peng et al, 2010), but the way resources are gathered and used in the organizations in terms of internal IT capabilities do so (Soto-Acosta & Meroño-Cerdan, 2008).…”

Management Commitments that Maximize Business Impact from IT

“…This dual perspective on performance has also been used in other studies (Tallon and Kraemer 2007). The combination of exogenous financial measures and directly reported perceptual measures helps provide a linking of evidence, going from IT investments via a firm's management capabilities (e.g., Muhanna and Stoel 2010;Tanriverdi 2006) to the perceptual impact of IT on important business goals and finally to the impact on financial performance. Prior research has also shown a significant correlation between perceptual measures of IT business value measures and financial performance (e.g., Tallon & Kraemer 2007) including ROA and ROE (Bharadwaj 2000;Wang et al 2008) or Tobin's Q (Aral and Weill 2007;Hitt and Brynjolfsson 1996).…”

Valor da tecnologia da informação na firma: estudo com empresas brasileiras

“…Predominantemente, as pesquisas utilizam dados de desempenho e de TI de empresas em países desenvolvidos (A. S. Bharadwaj, 2000;Muhanna & Stoel, 2010;Stoel & Muhanna, 2009), sendo restritas as investigações em países em desenvolvimento, como o Brasil. Características da indústria e da economia nesses dois grupos de países poderiam sinalizar para diferenças no valor da TI (Muhanna & Stoel, 2010;Stoel & Muhanna, 2009).…”