Value Implications of Relative Investments in Information Technology

In this study, we investigate how divergence from the industry level of investment in information technology (IT) affects firm value. Theoretical arguments suggest that greater investment in IT relative to industry peers may positively affect firm value and that smaller relative investment may negatively affect firm value, but these arguments have not been empirically tested. We perform our analysis using data obtained from disclosures of IT spending in preparation for the year 2000. During this period, firms had options to replace legacy applications with enterprise applications that could improve internal business processes and enhance external coordination with other members of the industry value chain. We document a positive relation between firm value and the amount by which a firm's IT spending in preparation for the year 2000 exceeded the industry median level and a negative relation between firm value and the amount by which the firm's IT spending lagged behind the industry median level. We also find a positive relation between firm value and the industry median level of IT spending, consistent with value creation through the development of IT infrastructure for the industry value chain.