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Value Implications of Investments in Information Technology

Author

Listed:
  • Mark C. Anderson

    (School of Management, University of Texas at Dallas, Richardson, Texas 75083)

  • Rajiv D. Banker

    (Fox School of Business, Temple University, Philadelphia, Pennsylvania 19122)

  • Sury Ravindran

    (W.P. Carey School of Business, Arizona State University, Tempe, Arizona 85287)

Abstract

The year 2000 (Y2K) countdown provided a uniquely visible instance of spending on information technology (IT) by U.S. companies. With public attention riveted on potential Y2K malfunctions, managers were forced to evaluate their IT and make decisions about whether to modify or replace existing systems. In the aftermath of Y2K, critics charged that the problem was overblown and that companies overspent on IT. In contrast, we posit in this paper that efforts companies made to renew and upgrade their IT may have positioned them to take advantage of new e-business applications. As Y2K approached, managers could invest opportunistically in IT, which would enable them to connect with customers and suppliers in new ways. Contrary to the alleged overspending, we find that firm value increased, on average, with Y2K spending by Fortune 1000 companies. In particular, higher firm value and subsequent earnings were associated with Y2K spending for firms in industries where IT was considered to have a transforming influence--altering traditional ways of doing business by redefining business processes and relationships. We also test whether the positive association between firm value and Y2K spending diminished with Y2K spending by industry peer firms, but we do not find support for this relative investment hypothesis.

Suggested Citation

  • Mark C. Anderson & Rajiv D. Banker & Sury Ravindran, 2006. "Value Implications of Investments in Information Technology," Management Science, INFORMS, vol. 52(9), pages 1359-1376, September.
    • Handle: RePEc:inm:ormnsc:v:52:y:2006:i:9:p:1359-1376
    DOI: 10.1287/mnsc.1060.0542
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    15. Scott, Susan V. & Van Reenen, John & Zachariadis, Markos, 2017. "The long-term effect of digital innovation on bank performance: An empirical study of SWIFT adoption in financial services," Research Policy, Elsevier, vol. 46(5), pages 984-1004.
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    18. Scott, Susan V. & Zachariadis, Markos, 2010. "The impact of the diffusion of a financial innovation on company performance: an analysis of SWIFT adoption," LSE Research Online Documents on Economics 48906, London School of Economics and Political Science, LSE Library.
    19. Stoel, M. Dale & Muhanna, Waleed A., 2011. "IT internal control weaknesses and firm performance: An organizational liability lens," International Journal of Accounting Information Systems, Elsevier, vol. 12(4), pages 280-304.
    20. Rajiv Banker & Yi Liang & Narayan Ramasubbu, 2021. "Technical Debt and Firm Performance," Management Science, INFORMS, vol. 67(5), pages 3174-3194, May.
    21. Martin Gneiser, 2010. "Value-Based CRM," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 2(2), pages 95-103, April.
    22. Amanat Ali & Shahid Iqbal & Syed Arslan Haider & Shehnaz Tehseen & Bilal Anwar & Mariam Sohail & Khalid Rehman, 2021. "Does Governance in Information Technology Matter When It Comes to Organizational Performance in Pakistani Public Sector Organizations? Mediating Effect of Innovation," SAGE Open, , vol. 11(2), pages 21582440211, May.
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