The Impact of Information Technology Investment Announcements on the Market Value of the Firm

Determining whether investments in information technology (IT) have an impact on firm performance has been and continues to be a major problem for information systems researchers and practitioners. Financial theory suggests that managers should make investment decisions that maximize the value of the firm. Using event-study methodology, we provide empirical evidence on the effect of announcements of IT investments on the market value of the firm for a sample of 97 IT investments from the finance and manufacturing industries from 1981 to 1988. Over the announcement period, we find no excess returns for either the full sample or for any one of the industry subsamples. However, cross-sectional analysis reveals that the market reacts differently to announcements of innovative IT investments than to followup, or noninnovative investments in IT. Innovative IT investments increase firm value, while noninnovative investments do not. Furthermore, the market's reaction to announcements of innovative and noninnovative IT investments is independent of industry classification. These results indicate that, on average, IT investments are zero net present value (NPV) investments; they are worth as much as they cost. Innovative IT investments, however, increase the value of the firm.