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Investigating the Risk-Return Relationship of Information Technology Investment: Firm-Level Empirical Analysis

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Author Info

  • Sanjeev Dewan

    ()
    (The Paul Merage School of Business, University of California at Irvine, Irvine, California 92697)

  • Charles Shi

    ()
    (The Paul Merage School of Business, University of California at Irvine, Irvine, California 92697)

  • Vijay Gurbaxani

    ()
    (The Paul Merage School of Business, University of California at Irvine, Irvine, California 92697)

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    Abstract

    This 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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    File URL: http://dx.doi.org/10.1287/mnsc.1070.0739
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 53 (2007)
    Issue (Month): 12 (December)
    Pages: 1829-1842

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    Handle: RePEc:inm:ormnsc:v:53:y:2007:i:12:p:1829-1842

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    Related research

    Keywords: IT capital; productivity paradox; IT returns; IT risk; IT investment; IT value; real options;

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    Cited by:
    1. Guido Schryen, 2010. "Preserving Knowledge on IS Business Value," Business & Information Systems Engineering, Springer, vol. 2(4), pages 233-244, August.
    2. 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.
    3. Peng Huang & Marco Ceccagnoli & Chris Forman & D.J. Wu, 2009. "Participation in a Platform Ecosystem: Appropriability, Competition, and Access to the Installed Base," Working Papers 09-14, NET Institute, revised Sep 2009.
    4. 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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