IDEAS home Printed from https://ideas.repec.org/a/inm/orisre/v12y2001i1p103-117.html
   My bibliography  Save this article

Research Report: A Reexamination of IT Investment and the Market Value of the Firm—An Event Study Methodology

Author

Listed:
  • Kun Shin Im

    (The College of Business and Administration, University of Colorado at Denver, Denver, Colorado 80217)

  • Kevin E. Dow

    (Accounting Department, The Fox School of Business and Management, Temple University, Philadelphia, Pennsylvania 19122)

  • Varun Grover

    (Management Science Department, The Darla Moore School of Business, University of South Carolina, Columbia, South Carolina 29208)

Abstract

Evaluating the effectiveness of Information Technology (IT) investments has always been an elusive but important goal of IS researchers. This study builds on a prior study that examined changes in the market value of the firm as reflected by the stock price in response to IT investment announcements. Data on stock prices were analyzed for 238 publicly traded companies. In addition to the stock price analysis, reaction of trading volume to the announcements was also examined to identify whether IT investment announcements affect investors' beliefs about IT value. Potentially confounding factors such as industry, size, and time lag effects were also analyzed. Size and time lag effects were found for all IT investment announcements. Reactions of price and volume were negatively related to firm size and became more positive over time. The positive excess return for smaller firms shows that smaller firms can leverage the lower price/performance ratio of new IT and reap greater rewards from IT investments than larger firms. Also, the result of time lag effect demonstrates that the stock market has recently begun to identify both tangible and intangible benefits of IT investments. For recent IT investment announcements, industry classification and firm size also affected the reactions of stock price to the announcements. This study provides optimism on the stock market reaction to IT investment announcements as well as further insight into the study of IT impacts on organizational performance.

Suggested Citation

  • Kun Shin Im & Kevin E. Dow & Varun Grover, 2001. "Research Report: A Reexamination of IT Investment and the Market Value of the Firm—An Event Study Methodology," Information Systems Research, INFORMS, vol. 12(1), pages 103-117, March.
  • Handle: RePEc:inm:orisre:v:12:y:2001:i:1:p:103-117
    DOI: 10.1287/isre.12.1.103.9718
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1287/isre.12.1.103.9718
    Download Restriction: no

    File URL: https://libkey.io/10.1287/isre.12.1.103.9718?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Atiase, Rk, 1985. "Predisclosure Information, Firm Capitalization, And Security Price Behavior Around Earnings Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 23(1), pages 21-36.
    2. Morse, D, 1981. "Price And Trading Volume Reaction Surrounding Earnings Announcements - A Closer Examination," Journal of Accounting Research, Wiley Blackwell, vol. 19(2), pages 374-383.
    3. Erik Brynjolfsson, 1994. "Information Assets, Technology and Organization," Management Science, INFORMS, vol. 40(12), pages 1645-1662, December.
    4. Tkac, Paula A., 1999. "A Trading Volume Benchmark: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 34(1), pages 89-114, March.
    5. Anandhi S. Bharadwaj & Sundar G. Bharadwaj & Benn R. Konsynski, 1999. "Information Technology Effects on Firm Performance as Measured by Tobin's q," Management Science, INFORMS, vol. 45(7), pages 1008-1024, July.
    6. Loderer, Claudio F & Mauer, David C, 1992. "Corporate Dividends and Seasoned Equity Issues: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 47(1), pages 201-225, March.
    7. Kim, O & Verrecchia, Re, 1991. "Trading Volume And Price Reactions To Public Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 29(2), pages 302-321.
    8. Brian L. Dos Santos & Ken Peffers & David C. Mauer, 1993. "The Impact of Information Technology Investment Announcements on the Market Value of the Firm," Information Systems Research, INFORMS, vol. 4(1), pages 1-23, March.
    9. Foster, G, 1973. "Stock Market Reaction To Estimates Of Earnings Per Share By Company Officials," Journal of Accounting Research, Wiley Blackwell, vol. 11(1), pages 25-37.
    10. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    11. Bamber, Ls, 1986. "The Information-Content Of Annual Earnings Releases - A Trading Volume Approach," Journal of Accounting Research, Wiley Blackwell, vol. 24(1), pages 40-56.
    12. Richard K. Lester & Mark J. McCabe, 1993. "The Effect of Industrial Structure on Learning by Doing in Nuclear Power Plant Operation," RAND Journal of Economics, The RAND Corporation, vol. 24(3), pages 418-438, Autumn.
    13. Gerald J. Lobo & Samuel Tung, 1997. "Relation Between Predisclosure Information Asymmetry and Trading Volume Reaction Around Quarterly Earnings Announcements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(6), pages 851-867.
    14. Peter Weill, 1992. "The Relationship Between Investment in Information Technology and Firm Performance: A Study of the Valve Manufacturing Sector," Information Systems Research, INFORMS, vol. 3(4), pages 307-333, December.
    15. Beaver, Wh, 1968. "Information Content Of Annual Earnings Announcements," Journal of Accounting Research, Wiley Blackwell, vol. 6, pages 67-92.
    16. Morse, Dale, 1980. "Asymmetrical Information in Securities Markets and Trading Volume," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(5), pages 1129-1148, December.
    17. Karpoff, Jonathan M., 1987. "The Relation between Price Changes and Trading Volume: A Survey," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(1), pages 109-126, March.
    18. Gerald J. Lobo & Samuel Tung, 1997. "Relation Between Predisclosure Information Asymmetry and Trading Volume Reaction Around Quarterly Earnings Announcements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 24(6), pages 851-867, July.
    19. Berges, Angel & McConnell, John J & Schlarbaum, Gary G, 1984. "The Turn-of-the-Year in China," Journal of Finance, American Finance Association, vol. 39(1), pages 185-192, March.
    20. Sirkka L. Jarvenpaa & Blake Ives, 1990. "Information Technology and Corporate Strategy: A View from the Top," Information Systems Research, INFORMS, vol. 1(4), pages 351-376, December.
    21. Jensen, Michael C., 1978. "Some anomalous evidence regarding market efficiency," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 95-101.
    22. Verrecchia, Re, 1981. "On The Relationship Between Volume Reaction And Consensus Of Investors - Implications For Interpreting Tests Of Information-Content," Journal of Accounting Research, Wiley Blackwell, vol. 19(1), pages 271-283.
    23. Brown, Stephen J. & Warner, Jerold B., 1985. "Using daily stock returns : The case of event studies," Journal of Financial Economics, Elsevier, vol. 14(1), pages 3-31, March.
    24. Bing Xiang, 1993. "The Choice of Return†Generating Models and Cross†Sectional Dependence in Event Studies," Contemporary Accounting Research, John Wiley & Sons, vol. 9(2), pages 365-394, March.
    25. Neil L. Fargher & Robert A. Weigand, 1998. "Changes In The Stock Price Reaction Of Small Firms To Common Information," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 21(1), pages 105-121, March.
    26. Fargher, Neil L & Weigand, Robert A, 1998. "Changes in the Stock Price Reaction of Small Firms to Common Information," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 21(1), pages 105-121, Spring.
    27. Kiger, Je, 1972. "Empirical Investigation Of Nyse Volume And Price Reactions To Announcement Of Quarterly Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 10(1), pages 113-128.
    28. McConnell, John J. & Muscarella, Chris J., 1985. "Corporate capital expenditure decisions and the market value of the firm," Journal of Financial Economics, Elsevier, vol. 14(3), pages 399-422, September.
    29. Brown, Stephen J. & Warner, Jerold B., 1980. "Measuring security price performance," Journal of Financial Economics, Elsevier, vol. 8(3), pages 205-258, September.
    30. Wang, Jiang, 1994. "A Model of Competitive Stock Trading Volume," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 127-168, February.
    31. Erik Brynjolfsson & Lorin Hitt, 1996. "Paradox Lost? Firm-Level Evidence on the Returns to Information Systems Spending," Management Science, INFORMS, vol. 42(4), pages 541-558, April.
    32. Karpoff, Jonathan M, 1986. "A Theory of Trading Volume," Journal of Finance, American Finance Association, vol. 41(5), pages 1069-1087, December.
    33. Dann, Larry Y. & Mikkelson, Wayne H., 1984. "Convertible debt issuance, capital structure change and financing-related information : Some new evidence," Journal of Financial Economics, Elsevier, vol. 13(2), pages 157-186, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Yadav, Pradeep K., 1992. "Event studies based on volatility of returns and trading volume: A review," The British Accounting Review, Elsevier, vol. 24(2), pages 157-184.
    2. Sonia Sanabria, 2004. "Comportamiento De Los Precios Y Volúmenes De Negociación Ante Anuncios De Beneficios Anuales," Working Papers. Serie EC 2004-03, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    3. Thusitha Mahipala & Howard Chan & Robert Faff, 2009. "Trading volume and information asymmetry: routine versus nonroutine earnings announcements in Australia," Applied Financial Economics, Taylor & Francis Journals, vol. 19(21), pages 1737-1752.
    4. H. Jonathan Jang & Byung T. Ro, 1989. "Trading volume theories and their implications for empirical information content studies," Contemporary Accounting Research, John Wiley & Sons, vol. 6(1), pages 242-262, September.
    5. Choi, Jong-Seo & Choe, Chongwoo, 1998. "Explanatory factors for trading volume responses to annual earnings announcements: Evidence from the Korean stock market," Pacific-Basin Finance Journal, Elsevier, vol. 6(1-2), pages 193-212, May.
    6. Pieper, Ute & Schiereck, Dirk & Weber, Martin, 1992. "Die Kaufempfehlungen des "Effecten-Spiegel": Eine empirische Untersuchung im Lichte der Effizienzthese des Kapitalmarktes," Manuskripte aus den Instituten für Betriebswirtschaftslehre der Universität Kiel 296, Christian-Albrechts-Universität zu Kiel, Institut für Betriebswirtschaftslehre.
    7. Bailey, Warren & Mao, Connie X. & Sirodom, Kulpatra, 2007. "Investment restrictions and the cross-border flow of information: Some empirical evidence," Journal of International Money and Finance, Elsevier, vol. 26(1), pages 1-25, February.
    8. Paul Ryan & Richard J. Taffler, 2004. "Are Economically Significant Stock Returns and Trading Volumes Driven by Firm‐specific News Releases?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(1‐2), pages 49-82, January.
    9. Ryan, Paul, 2005. "The market impact of directors' trades: relationship to various measures of a firm's information environment," The British Accounting Review, Elsevier, vol. 37(3), pages 319-337.
    10. Ray Ball & Lakshmanan Shivakumar, 2008. "How Much New Information Is There in Earnings?," Journal of Accounting Research, Wiley Blackwell, vol. 46(5), pages 975-1016, December.
    11. Liyi Zheng, 2020. "The type of corporate announcements and its implication on trading behaviour," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(S1), pages 629-659, April.
    12. Hannu, Schadewitz, 1997. "Financial and nonfinancial information in interim reports: Determinants and implications," MPRA Paper 44292, University Library of Munich, Germany.
    13. Brogaard, Jonathan & Koski, Jennifer L. & Siegel, Andrew F., 2019. "Do upgrades matter? Evidence from trading volume," Journal of Financial Markets, Elsevier, vol. 43(C), pages 54-77.
    14. Barron, Orie E. & Karpoff, Jonathan M., 2004. "Information precision, transaction costs, and trading volume," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1207-1223, June.
    15. Salim Chahine, 2006. "Differential Interpretations, Private Information and Trading Volume Around French Firms' Good News vs. Bad News Preliminary Announcements," European Accounting Review, Taylor & Francis Journals, vol. 15(3), pages 403-429.
    16. Monica Martinez-Blasco & Vanessa Serrano & Francesc Prior & Jordi Cuadros, 2023. "Analysis of an event study using the Fama–French five-factor model: teaching approaches including spreadsheets and the R programming language," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-34, December.
    17. Gagnon, Louis & Karolyi, G. Andrew, 2009. "Information, Trading Volume, and International Stock Return Comovements: Evidence from Cross-Listed Stocks," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(4), pages 953-986, August.
    18. Jiang Wang, 2002. "Trading Volume and Asset Prices," Annals of Economics and Finance, Society for AEF, vol. 3(2), pages 299-359, November.
    19. Nick Collett, 2004. "Reactions of the London Stock Exchange to Company Trading Statement Announcements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(1‐2), pages 3-35, January.
    20. Olibe, Kingsley O., 2016. "Security Returns and Volume Responses Around International Financial Reporting Standards (IFRS) Earnings Announcements," The International Journal of Accounting, Elsevier, vol. 51(2), pages 240-265.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:inm:orisre:v:12:y:2001:i:1:p:103-117. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Asher (email available below). General contact details of provider: https://edirc.repec.org/data/inforea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.