Investigating the Risk-Return Relationship of Information Technology Investment: Firm-Level Empirical Analysis

Sanjeev Dewan (), Charles Shi () and Vijay Gurbaxani ()
Additional contact information
Sanjeev Dewan: The Paul Merage School of Business, University of California at Irvine, Irvine, California 92697
Charles Shi: The Paul Merage School of Business, University of California at Irvine, Irvine, California 92697
Vijay Gurbaxani: The Paul Merage School of Business, University of California at Irvine, Irvine, California 92697

Management Science, 2007, vol. 53, issue 12, 1829-1842

Abstract: This paper develops empirical proxy measures of information technology (IT) risk and incorporates them into the usual empirical models for analyzing IT returns: production function and market value specifications. The results suggest that IT capital investments make a substantially larger contribution to overall firm risk than non-IT capital investments. Further, firms with higher IT risk have a higher marginal product of IT relative to firms with low IT risk. In the market value specification, the impact of IT risk is positive and significant, and inclusion of the IT risk term substantially reduces the coefficient on IT capital. We estimate that about 30% of the gross return on IT investment corresponds to the risk premium associated with IT risk. Taken together, our results show that IT risk provides part of the explanation for the unusually high valuations of IT capital investment in recent research.

Keywords: IT capital; productivity paradox; IT returns; IT risk; IT investment; IT value; real options (search for similar items in EconPapers)
Date: 2007
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (44)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.1070.0739 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:53:y:2007:i:12:p:1829-1842

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().