Motivated by the wide dispersion in the returns on the use of information technology (IT) across industries, we conduct an industry-level examination of IT return and risk, focusing on the moderating role of industry competition, regulation, and technological change. We address the following research questions: What is the impact of IT investment on the return and risk dimensions of industry financial performance? How do industry characteristics moderate the relationship between IT investment and industry performance? Our analysis of these questions finds that higher levels of industry competition are associated with higher IT productivity (contribution of IT to value-added output), lower IT profitability (contribution of IT to industry average return on assets [ROA]), and higher IT risk (contribution of IT to ex ante variability of ROA). This is consistent with the notion that competition induces riskier IT investments, despite the fact that returns tend to be competed away. Higher levels of industry regulation are associated with lower IT returns in both productivity and profitability, but also lower IT risk. Finally, a higher rate of technological change induces both higher IT returns and higher IT risk. A variety of tests indicate that our results are robust. Our results shed light on factors that drive variation in IT performance across industries, and provide useful industry-level performance benchmarks of the return and risk impacts of IT investments. > >
In this paper, we empirically investigate the impact of information technology (IT) investment on firm return and risk financial performance, emphasizing the moderating role of the firm boundary strategies of diversification and vertical integration. Our results indicate a sharp contrast between the direct and interactive effects of IT on both the return (profitability) and risk (variability of returns) dimensions. Although the direct effect of IT capital is to increase firm risk for a given level of return, we find that suitable boundary strategies can moderate the impact of IT on firm performance in a way that increases return and decreases risk, at the margin. This interaction effect is strongest in service firms, in firms with high levels of IT investment intensity, and in more recent time periods. Our results are robust to alternative proxies for firm risk, including an ex ante risk measure (variability of analysts' earnings estimates), and alternative risk-return specifications. Put together, our results provide new insights into how IT and firm boundary strategies interact to affect the risk and return performance of firms.
This paper takes an event study approach to jointly examine the wealth and risk effects associated with electronic commerce announcements, contributing to the emerging research on the riskiness of IT investments and the trade-off between risk and return in the information systems literature. We estimate a generalized event study model that allows for both systematic and unsystematic risk changes on data collected for electronic commerce announcements in the 1996-2002 time frame. A striking result emerging from our analysis is that wealth effects are not significant after controlling for contemporaneous risk changes. Both total and unsystematic risk show a significant postevent increase in 1998 and 2000, whereas systematic risk adjusts downward in 1996 and 2002. Put together, our results contribute to our nascent understanding of how IT initiatives affect the risk-return profile of the firm.