Market Myopia And Firm Specific Risk: Reexamining The Financial Value Of Information Technology Decisions

Firm-level studies of the financial impacts of Information Technology (IT) events have often focused on announcement period returns based on the capital asset pricing model (CAPM). This approach may have two sets of distinct but related limitations for many classes of IT events. First, the use of announcement period assumes the market is efficient in its assimilation and pricing of all information about the event. However, a firm not be aware of the organizational changes required for success of the IT event, or may not have the incentive to disclose such information for competitive reasons. Either way, we expect many types of IT events to be characterized by low information disclosure, which, along with investor biases, is likely to impede efficient pricing of the IT event by financial markets. Second, event studies in Information Systems (IS) largely rely on CAPM, which considers only systematic risks in the pricing of expected returns on IT assets, and assumes that idiosyncratic or firm-specific risks are eliminated through efficient diversification. Yet one of the foundations of the IS discipline is the notion that IT matters, largely because firms have different capabilities to develop, deploy and manage IT resources to create value. Thus there is a disconnect between a basic theoretical tenet of the IS field and the methodology deployed to assess the value of IT events. We develop a framework involving the maturity of the IT event and the scope of complementary changes to assess the extent of information disclosure and idiosyncratic risk, which, in turn, indicate the suitability of different methodologies to assess financial value of the IT event. We empirically illustrate our approach for the case of large scale IT and IT-enabled outsourcing, and conclude with implications for future IS research.