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Research Note ---Business Value of Information Technology: Testing the Interaction Effect of IT and R&D on Tobin's Q

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  • Indranil Bardhan

    (Jindal School of Management, The University of Texas at Dallas, Richardson, Texas 75080)

  • Viswanathan Krishnan

    (Rady School of Management, University of California, San Diego, La Jolla, California 92093)

  • Shu Lin

    (Craig School of Business, California State University, Fresno, Fresno, California 93740)

Abstract

The business case for investing in information technology (IT) has received increasing scrutiny in recent years. We propose that IT investments create additional business value through interactions with other business processes. In this paper, we formalize the interaction effect of IT by focusing on one core function, namely, research and development (R&D). We hypothesize that investments in IT can interact with and complement a firm's R&D investments, enhancing the firm's shareholder value creation potential. We test this by hypothesis by estimating the interaction impact of IT and R&D investments on Tobin's q, a forward-looking measure of firm performance using a recent multiyear, firm-level, archival data set. Our results suggest that the interaction effect of R&D and IT on Tobin's q is positive and significant after controlling for other firm- and industry-specific effects. Our findings provide rigorous empirical support for recent anecdotal evidence in the managerial literature with respect to the manner in which IT is enabling R&D-intensive innovation processes. Our analysis underscores the need for coordinated investments in IT and R&D, and permeating IT capabilities throughout other business processes such as R&D.

Suggested Citation

  • Indranil Bardhan & Viswanathan Krishnan & Shu Lin, 2013. "Research Note ---Business Value of Information Technology: Testing the Interaction Effect of IT and R&D on Tobin's Q," Information Systems Research, INFORMS, vol. 24(4), pages 1147-1161, December.
    • Handle: RePEc:inm:orisre:v:24:y:2013:i:4:p:1147-1161
    DOI: 10.1287/isre.2013.0481
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