Seeking Value Through Deviation? Economic Impacts of IT Overinvestment and Underinvestment

Joanna Ho (), Feng Tian (), Anne Wu () and Sean Xin Xu ()
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Joanna Ho: Paul Merage School of Business, University of California, Irvine, Irvine, California 92697
Feng Tian: School of Accounting and Finance, Hong Kong Polytechnic University, Hung Hom, Hong Kong, China
Anne Wu: College of Commerce, National Chengchi University, Taipei 11605, China
Sean Xin Xu: Research Center for Contemporary Management, Key Research Institute of Humanities and Social Sciences at Universities, School of Economics and Management, Tsinghua University, 100084 Beijing, China

Information Systems Research, 2017, vol. 28, issue 4, 850-862

Abstract: This study addresses the economic impacts of information technology (IT) overinvestment and underinvestment decisions. Based on the view of Red Queen competition in conjunction with institutional theory, we hypothesize that overinvestment and underinvestment in IT have nonlinear performance impacts. Drawing on the idea of management control mechanisms, we further hypothesize that the performance impacts are conditional on ownership concentration. Using a sample of S&P 500 firms, we find that, on average, there is a positive relationship between a firm’s overinvestment in IT and Tobin’s q , although that relationship attenuates at higher levels of overinvestment. However, there is, on average, no relationship between a firm’s underinvestment in IT and its Tobin’s q . Importantly, the payoff for underinvestment becomes positive for companies with founding-family ownership. Implications for research and practice are discussed.

Keywords: IT investment; firm performance; deviation; overinvestment; underinvestment; Red Queen; concentrated ownership (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (9)

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