How Do Investors Value IT? An Empirical Investigation of the Value Relevance of IT Capability and IT Spending Across Industries

Abstract—Drawing on the resource-based theory of the firm and using Ohlson’s (1995) residual income valuation framework, this paper investigates the relationships between IT Capability, IT spending and market value. We also examine the role of industry context by empirically investigating the moderating role of three industry characteristics (munificence, dynamism, and complexity). A firm’s IT Capability refers to its capacity to leverage the potential of information technology. Using a matched sample design methodology and publicly available ratings, and after controlling for firm-specific determinants as well as industry fixed-effects, we find that IT capability is value relevant; i.e., the stock market values of firms with superior IT Capability are both economically and statistically higher than the values of a control sample. This result is remarkably robust to variations in the matching criteria, sampling method, and model specifications employed. Additionally, we show that IT capability is valued differently across industries, with IT capability being more value relevant in industries characterized by high levels of munificence (growth) and complexity. Moreover, consistent with resource-based expectations, our results find IT capability to be value relevant whereas IT spending did not explain variation in market values. These results are shown to hold using two unique archival data sets representing the immediate pre-internet (92-94) and a post internet commercialization (99-06) eras. Overall, our analysis suggests that, contingent on certain industry characteristics, investors reward firms with superior IT capabilities through higher market values, in recognition of IT capability’s potential effect on the size and risk associated with the firm’s future income stream, and that market performance differential from IT rests less on IT spending, per se, and more on the firm’s IT Capability. The implications of these findings to practice and research are discussed.