The Market Value Impact of IT Investment Announcements - An Event Study

ABSTRACT This study applies the event study method, a method to measure how a firm's stock price reacts to new information, to a list of publicly traded Australian firms, to investigate the impact of information and communication technology investments on the market value of the firm. We select 217 announcements relating to IT investments over a period from 1996 to 2006. Positive abnormal returns are observed on the announcement day of each of three distinct time periods; during the technology bubble (1996 to 1999), during the Year 2000 bug (Y2K bug) period (2000 - 2001), as well as the period afterwards that ensued to 2006. These are all statistically significant. We also find similar results when categorizing announcing firms into two broad industry groups; IT firms and non-IT firms. We value-weigh each announcement based on firm size and find that the market's assessment of the returns to IT investments is more favorable towards smaller firms than larger firms for the whole sample, across all periods and the two industry groups. On a whole, the research shows that IT investment announcements over the whole sampled periods yield statistically significant positive abnormal returns. This is valid for the announcement day, and over two event windows; the first one comprising the day before to the day after the announcement, and the second one encompassing the period 5 days before to 5 days after the announcement was made. These results are of practical relevance for the particular Australian market under investigation given the comparatively high levels of spending on IT in Australia in relation to other OECD countries. (ProQuest: . denotes formula omitted.) INTRODUCTION Since the advent of Information Communication and Technology (IT) in the workplace, one question in particular lingers in the minds of most investors and users of this technology, exactly what value does IT provide to firms? Solow (1987) argues that there is insufficient evidence to link investments in IT to gains in productivity. Helped by his famous words, which are quoted by Brynjolfsson (1993) that "we see computers everywhere except in the productivity statistics" (pg. 67) this fueled much debate and interest in IS research. IS researchers responded to Solow.s statement by studying the area of IT value more closely. This has lead to numerous approaches and methods, which attempt to capture and measure the broader value IT generates for the firm (Berghout and Renkema 2001). Certain measures focus on the value IT investments add to productivity whilst others focus on financial outcomes. Brynjolfsson (1993) argues that the statistics showing a distinct correlation between increases in IT spending and decreases in productivity for the U.S. economy are invalid, as their models are underspecified and do not take into account all relevant factors in explaining productivity other than IT. He states that very large changes in capital stock are needed to demonstrably affect total output under standard assumptions about typical rates of return. Brynjolfsson and Hitt (1996) find that the value IT investments add to firm output is both economically and statistically significant. We find similar results in the studies by Dewan and Min (1997) and subsequently by Dewan and Kraemer (2000). However, Gordon (2000) shows also contrary results, which suggest that only a few industries sustain productivity gains (firm productivity and performance in this paper refer to how efficient or effective a firm utilizes its assets to generate profits). Brynjolfsson (1993) offers four explanations as to why a paradox remains and why there is difficulty in equating firm gains to IT investments. The term productivity paradox. was coined in response to Solow.s (1987) statements that as new IT is introduced in firms, productivity of the workforce may go down and not up. The four explanations are; measurement errors in productivity statistics that may not account for the types of benefits managers typically attribute to IT, such as increased quality, customer services, speed and responsiveness. …