The Intangible Benefits and Costs of Computer Investments: Evidence from the Financial Markets

We model how the financial market valuation of firms can be used to estimate the intangible costs and benefits of computer capital and we present several new empirical results based on this model. Using eight years of data for over 1000 firms in the United States, we find that an increase of one dollar in the quantity of computer capital installed by a firm is associated with an increase of up to ten dollars in the financial markets' valuation of the firm. Other forms of capital do not exhibit these high valuations. Our model suggests that intangible assets can provide and explanation for the high market valuation found for computers in this study as well as the excess returns found for computer capital in other studies. Costly investments in software, training and organizational transformations that accompany computer investments can be regarded as creating intangible assets. These intangible assets do not appear on firms’ conventional balance sheets but they can produce both higher market valuations and “excess” returns. The empirical evidence suggests that up to nine-tenths of the costs and benefits of computer capital are embodied in otherwise unobserved intangible assets. A earlier version of this paper with was published in the Proceedings of the International Conference on Information Systems, Atlanta, GA, December, 1997. Significant changes have been made, including the new results using instrumental variable estimation and a comparison to R&D. We thank Lorin Hitt, Josh Angrist and two anonymous referees for valuable comments; the MIT Center for Coordination Science, the Stanford Computer Industry Project and NationsBanc Montgomery Securities for generous financial support and International Data Group and Computer Intelligence Corporation for providing valuable data. Intangible Value Page 2