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Riding the waves of technology through the decades: The relation between industry-level information technology intensity and the cost of equity capital

Kevin E. Dow, Marcia Weidenmier Watson and Vincent J. Shea

International Journal of Accounting Information Systems, 2017, vol. 25, issue C, 18-28

Abstract: This paper examines the effect that information technology (IT) investments have on the industry cost of equity capital. We find that industry IT intensity, defined as the relative amount of IT investment to total fixed asset expenditures, is negatively related to the industry cost of equity capital. These results indicate that industries with higher levels of IT investment have lower cost of equity capital. We also find that the relation between IT intensity and cost of equity capital changes over time. Initially, investors viewed IT investments as risky ventures and demanded higher levels of cost of equity (or higher return on their investment) for those industries investing in IT. However, beginning in the 1980s, as IT became more reliable, more cost effective, and had the ability to transform businesses, investors viewed IT Intensity as a positive business strategy with less associated risks and reduced their required cost of equity capital (or lower return on their investment). Extrapolating from our industry results, IT investments allow firms to potentially raise capital at a lower price so they have more assets to employ, indicating that IT investments can be a key factor for business success.

Keywords: Cost of equity capital; IT intensity; Fama-French three factor model (search for similar items in EconPapers)
Date: 2017
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