The Effects of Investments in Information Technology on Firm Performance: An Investor Perspective

The Effects of Investments in Information Technology on Firm Performance: An Investor Perspective

Jeffrey Wong (University of Nevada, Reno, USA) and Kevin E. Dow (University of Alaska, Anchorage, USA)
Copyright: © 2011 |Pages: 13
DOI: 10.4018/jitr.2011070101
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Analyzing the beneficial effects of investments in information technology (IT) is an area of research that interests investors and academics. A number of studies have examined whether investments in IT have a positive effect on some measure of earnings or other form of financial return. Results from these studies have been mixed. This paper extends the literature by adopting an investor’s perspective on firm performance when IT investments are made, using the preservation of capital as a performance measure. The authors examine companies that made public announcements of their investments in technology to see if they were able to mitigate losses to investors by reducing their downside risk to investors. This study further discusses whether different types of IT investments have different impacts on firm risk from an investor’s viewpoint. Findings suggest that IT investments impact a firm’s downside risk, and the authors offer an alternative perspective on the benefits of IT investments, particularly where no positive incremental financial results are evident.
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Prior literature relating investments in IT to the effect on firms has focused primarily on positive outcomes such as productivity gains or financial returns. Kohli and Davaraj (2003) and Melville et al. (2004) have noted that the results of studies focusing on the specific organizational performance and productivity improvements have been mixed. Given the mixed results of past studies, our use of the investor's perspective provides an alternative explanation about how IT investments may have a positive effect on firm performance. We will briefly discuss some of the key studies related to measuring the impact of IT investments on firm performance and then explain why using downside risk as an alternative measure makes sense.

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