Research Report: A Reexamination of IT Investment and the Market Value of the Firm—An Event Study Methodology

Abstract

Evaluating the effectiveness of Information Technology (IT) investments has always been an elusive but important goal of IS researchers. This study builds on a prior study that examined changes in the market value of the firm as reflected by the stock price in response to IT investment announcements. Data on stock prices were analyzed for 238 publicly traded companies. In addition to the stock price analysis, reaction of trading volume to the announcements was also examined to identify whether IT investment announcements affect investors' beliefs about IT value. Potentially confounding factors such as industry, size, and time lag effects were also analyzed. Size and time lag effects were found for all IT investment announcements. Reactions of price and volume were negatively related to firm size and became more positive over time. The positive excess return for smaller firms shows that smaller firms can leverage the lower price/performance ratio of new IT and reap greater rewards from IT investments than larger firms. Also, the result of time lag effect demonstrates that the stock market has recently begun to identify both tangible and intangible benefits of IT investments. For recent IT investment announcements, industry classification and firm size also affected the reactions of stock price to the announcements. This study provides optimism on the stock market reaction to IT investment announcements as well as further insight into the study of IT impacts on organizational performance.

An Empirical Analysis of the Impact of Software Vulnerability Announcements on Firm Stock Price

“…In Information Systems literature, Subramani and Walden [43] show that e-commerce announcements lead to significant increases in the stock price of firms. Im et al [32] examine the changes in a firm's market value in response to IT investment announcements.…”

Scale Without Mass: Business Process Replication and Industry Dynamics

“…A second consistent finding has been that neither IT endowments nor their impacts are evenly distributed (Kohli and Devaraj, 2003). IT investment levels themselves vary greatly across firms and industries, as do the organizational forms and practices accompanying these investments (Bresnahan, Brynjolfsson and Hitt, 2002) and the outcomes linked to them, including productivity and revenue gains (Dedrick et al, 2003;Brunner et al, 2006), stock market valuations (Brynjolfsson, Hitt and Yang, 2002;Im, Dow and Grover, 2001), levels of vertical integration and diversification (Hitt, 1999;Dewan, Michael and Min, 1998) and share-price volatility (Chun et al, 2005).…”

Preserving Knowledge on IS Business Value

“…Tam (1998) and Brynjolfsson and Hitt (1996) investigate the impact on "Total Shareholder Return", Dos Santos et al (1993) and Im et al (2001) analyze stock market reactions, and Bharadwaj et al (1999) and Brynjolfsson and Yang (1999) focus on Tobin's q. Although some studies find a positive correlation, Dedrick et al (2003, p. 10) argue that this correlation is of purely temporal nature, but lacks any causal characteristics, as many more micro-and macro-economic factors determine market performance.…”

“…Carr (2003) sums up doubts by even entitling his paper "IT doesn't matter". Another discourse is rooted in empirical studies that do not find evidence that IS positively affect performance (Dos Santos et al 1993;Rai et al 1997;Im et al 2001;Dehning and Stratopoulos 2002;Ko and Osei-Bryson 2004;Stiroh and Botsch 2007). Apparently, IS researchers have (at least not fully) managed to identify and to explain the economic relevance of IS.…”