Investigating the Risk-Return Relationship of Information Technology Investment: Firm-Level Empirical Analysis
AbstractThis paper develops empirical proxy measures of information technology (IT) risk and incorporates them into the usual empirical models for analyzing IT returns: production function and market value specifications. The results suggest that IT capital investments make a substantially larger contribution to overall firm risk than non-IT capital investments. Further, firms with higher IT risk have a higher marginal product of IT relative to firms with low IT risk. In the market value specification, the impact of IT risk is positive and significant, and inclusion of the IT risk term substantially reduces the coefficient on IT capital. We estimate that about 30% of the gross return on IT investment corresponds to the risk premium associated with IT risk. Taken together, our results show that IT risk provides part of the explanation for the unusually high valuations of IT capital investment in recent research.
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Bibliographic InfoArticle provided by INFORMS in its journal Management Science.
Volume (Year): 53 (2007)
Issue (Month): 12 (December)
IT capital; productivity paradox; IT returns; IT risk; IT investment; IT value; real options;
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- Kim, Sung Min & Mahoney, Joseph T., 2008. "Resource Co-specialization, Firm Growth, and Organizational Performance: An Empirical Analysis of Organizational Restructuring and IT Implementations," Working Papers 08-0107, University of Illinois at Urbana-Champaign, College of Business.
- Caliendo, Marco & Clement, Michel & Papies, Dominik & Scheel-Kopeinig, Sabine, 2008. "The Cost Impact of Spam Filters: Measuring the Effect of Information System Technologies in Organizations," IZA Discussion Papers 3755, Institute for the Study of Labor (IZA).
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