InformationWeek 500: Academic Research Yields Actionable Advice
What does the IW 500 data reveal about IT spending's connection to stock prices, outsourcing, and risk? Baylor business professor Kevin Kobelsky's research offers answers.
IT Spending Info May Move Your Stock Price
A company's IT expenditures help explain its future performance, both in accounting measures like income and earnings volatility, and in stock price. Companies making substantial (top quintile) IT investments tend to outperform the market, an effect that's most pronounced among underperformers that start investing heavily in IT. These impacts can be considerable: Firms with below-average returns on assets that then become top-quintile IT spenders provide returns to their investors 8% higher than low-ROA firms that don't make the IT investment. However, companies rarely reveal their IT spending and thus might contribute to stock market mispricing, since investors don't have that data to consider. In terms of regulatory policy, the research provides an argument for companies to disclose spending for IT in the same way they do for R&D.
Voluntarily revealing IT spending as part of quarterly earnings might help financial markets get companies' stock price right--for better or worse. However, this research focuses only on the potential gains from disclosure. The challenges and costs of disclosure, such as competitive effects, measurement difficulties, and preparation costs, are less clear. Whether the trade-offs of the cost and challenges of complying are worth the information benefit will depend on the firm.
"... We report evidence that firms' IT expenditure information predicts their concurrent market values and the level and volatility of future earnings. We also report evidence that firms with the highest IT intensity (IT expenditures relative to sales) earn abnormal buy-and-hold returns for one, two, and three years after the year of IT investment. Furthermore, these excess market returns accrue to firms with a record of below-average prior performance. Despite the likely pressure to improve earnings, managers of some poorly performing firms persist with a strategy of significant IT investment, seeming to accept the associated reduction in current earnings in anticipation of improved future performance."
"The Relevance Of Information Technology Expenditures," Journal Of Information Systems, Fall 2010 (not yet available)
Authors: B. Charlene Henderson, Kevin Kobelsky, Vernon J. Richardson, Rodney E. Smith