We examine the effect that investments in information technology (IT) have on downside risk profiles of companies that made public announcements of their investments in technology. Given the limitations of financial and decision theory perspectives on risk, we adopt the strategic management perspective that stresses downside risk as an important alternative measure of firm performance. We examine whether different types of IT investments have a differential impact on firm downside risk. Drawing on the resource-based view of the firm and the real options perspective, we find evidence that IT investments and their timing influence organizational downside risk. Transformational and informational IT investments lead to a reduction in downside risk only if they lead to strategic IT investments in the industry. For competitive necessities such as IT investments that automate business functions, a reduction in downside risk is realized by investing in parity with industry participants. Our study contributes to the literature by offering an alternative perspective on the benefits of IT investments, particularly where no apparent incremental financial results may be evident. It also generates insights on IT investment strategies that may help firms keep up with or stay ahead of the competition.
It has been argued that the intangible benefits of IT, in areas such as improved quality, variety, timeliness, and customization have not been appropriately measured. Many IT productivity studies that use conventional productivity measurement techniques fail to consider many of the improvements in economic output brought- about by IT. To complement these productivity studies, a powerful argument can he made for the use of the event study methodology that has become popular in the accounting and finance literatures.' The event study methodology is a powerful tool that can help IS researchers assess the business performance of IT investments using such marker-based measures as stock once or trading volume, it obviates the need to analyze accounting-based measures of IT investments' benefits, which have been criticized because they are often not adequate indicators of the performance of investments. This method enables researchers to measure stock price changes that can serve as estimates for the effectiveness of the firm in foreseeing and rapidly adapting to its changing environment.