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

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.

[1]  Peter Weill,et al.  The Relationship Between Investment in Information Technology and Firm Performance: A Study of the Valve Manufacturing Sector , 1992, Inf. Syst. Res..

[2]  John E. Prescott,et al.  Market Value Impact Of Joint Ventures: The Effect Of Industry Information-Processing Load , 1995 .

[3]  Sundar G. Bharadwaj,et al.  Information Technology Effects on Firm Performance as Measured by Tobin's q , 1999 .

[4]  E. Fama.  EFFICIENT CAPITAL MARKETS: A REVIEW OF THEORY AND EMPIRICAL WORK* , 1970 .

[5]  Robert E. Verrecchia.  On The Relationship Between Volume Reaction And Consensus Of Investors - Implications For Interpreting Tests Of Information-Content , 1981 .

[6]  B. Xiang,et al.  The Choice of Return‐Generating Models and Cross‐Sectional Dependence in Event Studies* , 1993 .

[7]  Neil Fargher,et al.  CHANGES IN THE STOCK PRICE REACTION OF SMALL FIRMS TO COMMON INFORMATION , 1998, Journal of Financial Research.

[8]  Erik Brynjolfsson,et al.  The productivity paradox of information technology , 1993, CACM.

[9]  Dennis E. Logue,et al.  Foundations of Finance. , 1977 .

[10]  Gerald J. Lobo,et al.  Relation Between Predisclosure Information Asymmetry and Trading Volume Reaction Around Quarterly Earnings Announcements , 1997 .

[11]  Larry Y. Dann,et al.  Convertible debt issuance, capital structure change and financing-related information: Some new evidence , 1984 .

[12]  Jerold B. Warner,et al.  MEASURING SECURITY PRICE PERFORMANCE , 1980 .

[13]  Jason Lee,et al.  Institutional Holdings and Trading Volume Reactions to Quarterly Earnings Announcements , 1997 .

[14]  W. Beaver.  The Information Content Of Annual Earnings Announcements , 1968 .

[15]  Robert E. Verrecchia,et al.  Trading Volume And Price Reactions To Public Announcements , 1991 .

[16]  Linda Smith Bamber,et al.  Trading volume reactions to annual accounting earnings announcements: The incremental role of predisclosure information asymmetry☆ , 1994 .

[17]  Lee Ridgway,et al.  Is Information Systems Spending Productive? , 1995, SIGU.

[18]  Diane Wilson.  Assessing the impact of information technology on organizational performance , 1993 .

[19]  Erik Brynjolfsson,et al.  Information assets, technology, and organization , 1994 .

[20]  Dale L. Morse,et al.  Price And Trading Volume Reaction Surrounding Earnings Announcements - A Closer Examination , 1981 .

[21]  Jerold B. Warner,et al.  Using daily stock returns: The case of event studies , 1985 .

[22]  F. McFarlan,et al.  Corporate Information Systems Management: Issues Facing Senior Executives , 1995 .

[23]  Claudio Loderer,et al.  Corporate Dividends and Seasoned Equity Issues: An Empirical Investigation , 1992 .

[24]  M. Porter,et al.  How Information Gives You Competitive Advantage , 1985 .

[25]  Jiang Wang,et al.  A Model of Competitive Stock Trading Volume , 1994, Journal of Political Economy.

[26]  E. Brynjolfsson,et al.  Paradox Lost? Firm-Level Evidence on the Returns to Information Systems Spending , 1996 .

[27]  Rowland K. Atiase,et al.  Predisclosure Information, Firm Capitalization, And Security Price Behavior Around Earnings Announcements , 1985 .

[28]  Lorin M. Hitt,et al.  Beyond the productivity paradox , 1998, CACM.

[29]  Erik Brynjolfsson,et al.  Information Technology and Productivity: A Review of the Literature , 1996, Adv. Comput..

[30]  Dale L. Morse,et al.  Asymmetrical Information in Securities Markets and Trading Volume , 1980, Journal of Financial and Quantitative Analysis.

[31]  Mark Kritzman,et al.  What Practitioners Need to Know…About Event Studies , 1994 .

[32]  Abagail McWilliams,et al.  Event Studies In Management Research: Theoretical And Empirical Issues , 1997 .

[33]  Linda Smith Bamber.  The information content of annual earnings releases : a trading volume approach , 1986 .

[34]  Ken Peffers,et al.  The Impact of Information Technology Investment Announcements on the Market Value of the Firm , 1993, Inf. Syst. Res..

[35]  Blake Ives,et al.  Information Technology and Corporate Strategy: A View from the Top , 1990, Inf. Syst. Res..

[36]  Jonathan M. Karpoff.  The Relation between Price Changes and Trading Volume: A Survey , 1987, Journal of Financial and Quantitative Analysis.

[37]  John Mcconnell,et al.  Corporate capital expenditure decisions and the market value of the firm , 1985 .

[38]  George Foster,et al.  Stock Market Reaction To Estimates Of Earnings Per Share By Company Officials , 1973 .

[39]  Jonathan M. Karpoff.  A Theory of Trading Volume , 1986 .

[40]  H. Russell Johnston,et al.  Developing Capabilities to Use Information Strategically , 1988, MIS Q..

[41]  M. C. Jensen.  Some Anomalous Evidence Regarding Market Efficiency , 1978 .

[42]  T. Allen,et al.  Information Technology and the Corporation of the 1990s: Research Studies , 1994 .

[43]  Paula A. Tkac.  A Trading Volume Benchmark: Theory and Evidence , 1998, Journal of Financial and Quantitative Analysis.

[44]  Michael R. Vitale,et al.  Creating Competitive Advantage with Interorganizational Information Systems , 1988, MIS Q..

[45]  Jack E. Kiger.  An Empirical Investigation of NYSE Volume and Price Reactions to the Announcement of Quarterly Earnings , 1972 .

[46]  John J. McConnell,et al.  The Turn‐of‐the‐Year in Canada , 1984 .

[47]  Lorin M. Hitt,et al.  Is Information Systems Spending Productive? New Evidence and New Results , 1993, ICIS.

[48]  Lorin M. Hitt,et al.  Productivity, Business Profitability, and Consumer Surplus: Three Different Measures of Information Technology Value , 1996, MIS Q..