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Article Excerpt
ABSTRACT: Understanding the return on investments in information technology (IT) is the focus of a large and growing body of research. The objective of this paper is to synthesize this research and develop a model to guide future research in the evaluation of information technology investments. We focus on archival studies that use accounting or market measures of firm performance. We emphasize those studies where accounting researchers with interest in market-level analyses of systems and technology issues may hold a competitive advantage over traditional information systems (IS) researchers. We propose numerous opportunities for future research. These include examining the relation between IT and business processes, and business processes and overall firm performance, understanding the effect of contextual factors on the IT-performance relation, examining the IT-performance relation in an international context, and examining the interactive effects of if spending and IT management on firm performance.
Keywords: information technology; literature review; performance measures; returns; market measures; accounting measures; research opportunities.
I. INTRODUCTION
A large and growing body of information systems (IS) research investigates the return on investments in information technology (IT). The objective of this paper is to encourage researchers to explore the synergies between accounting and IS, and to consider where accounting researchers trained in firm- and market-level analysis may contribute to this area.
Quantifying the financial returns on IT investments is a major topic of IS research. In the early 1990s, researchers found a productivity paradox concerning IT investments. This paradox showed IT investments with negative or zero returns. In an age where management carefully weighs the costs and benefits of every discretionary investment dollar, finding evidence of the returns on IT investments is critical. In particular, research considering the context surrounding an IT investment is likely to be essential and useful to corporate IT management.
This paper is not a comprehensive review of the IS literature. Instead, it synthesizes prior research, and develops a model to guide future research in the evaluation of information systems investments. Our model can act as a guide for researchers interested in pursuing a line of traditional IS research where accounting researchers may hold a competitive advantage. Thus, we focus on studies using archival data and accounting or market measures of firm performance. Numerous IS studies that use a variety of methods such as field studies, surveys, and experiments are beyond the scope of this paper.
Sircar et al. (1998) review the literature on the impact of IT on firm performance through 1996. As necessary, we review research covered in their paper as background material. We then add two areas not covered in their work: market performance measures and papers published after 1996. In order to provide a complete view of this recent literature, we examine the tables of contents in the leading journals in information systems from 1997 to the first half of 2001. (1) Relevant working papers are also included. To provide an unbiased sample of working papers, we examine the Proceedings of the International Conference on Information Systems and the American Accounting Association Annual Meeting from 1997 to 2001.
Returns on Investments in IT: The Productivity Paradox and Beyond
The "Productivity Paradox" refers to the early literature on the relation between IT and productivity that finds an absence of a positive relation between spending on IT and productivity or profitability. Research on the paradox exists on two levels. The first is at the industry- or economy-wide level. This was summed up in 1987 by Nobel Prize-winning economist Robert Solow, who wrote, "We see the computer age everywhere except in the productivity statistics." (2) The second Productivity Paradox was observed at the company level, where "there was no correlation whatsoever between expenditures for information technologies and any known measure of profitability." (3) It is the second version of the Productivity Paradox that most intrigues researchers in IT (e.g., Brynjolfsson 1993; Landauer 1995; Strassmann 1990, 1997a; Weill 1992). These early studies confirm either no relation or a slightly negative relation between firm-level spending on IT and firm performance.
However, by the late 1990s several studies found there were positive payoffs from investments in IT (Brynjolfsson and Hitt 1995, 1996; Dewan and Min 1997; Hitt and Brynjolfsson 1996; Lichtenberg 1995; Stratopoulos and Dehning 2000). The question changed from "is there a payoff" to "when and why is there a payoff." Because the payoffs from IT appear contingent, Brynjolfsson and Hitt (1998) call for more research into what determines success, and how to make IT effective. It is in this area that we believe accounting researchers can leverage their knowledge and skills to make a significant contribution to our understanding of the benefits of IT investments.
We organize this paper as follows. First we introduce the return on IT investments research, and discuss the comparative advantage of accounting researchers in this area. In the next section we develop a model to categorize the research in this area. To organize our discussion of IT investments, we classify each study into one of three categories: IT spending, IT strategy, or IT management/capability. In the next section we review related work in accounting and finance, and discuss potential areas for future research. The final section provides our conclusions.
II. COMPARATIVE ADVANTAGE OF ACCOUNTING RESEARCHERS
Accounting doctoral programs generally require a seminar in empirical-archival research studies. This seminar often includes research designs that emphasize stock market returns and accounting performance measures. In addition, accounting doctoral students are generally familiar with the use of short-and long-window event studies and market valuation studies. In addition, they are often knowledgeable about the trade-offs of using different accounting measures such as Return on Assets (ROA), Return on Equity (ROE), Return on Sales (ROS), and Return on Investment (ROI). Accounting researchers may have clear insights into how IT investments might affect intermediate financial performance measures such as profit margin and turnover ratios. Accounting researchers with these skills can leverage them in an IS context by examining the returns on investments in IT.
Accounting researchers have long been interested in returns on investments in research and development (R&D), advertising, and capital expenditures, which makes the study of the returns on IT investments a natural extension of current accounting research. This allows accounting researchers to use the concepts and designs developed from researching the returns on discretionary management investments, and apply them to the IT context.
In addition, accounting researchers may have a competitive advantage in relating the implications of IT research to non-MIS user groups such as the firm's financial management, investors, financial analysts, auditors, regulators, etc. The managerial accounting literature has long considered the environment in which a firm operates as an important determinant of the success of a company's management accounting systems. Many of these concepts have yet to appear in the IS literature.
III. INTRODUCTION TO THE LITERATURE REVIEW
We propose a framework for IS research by considering the returns on investments in IT measured with market measures such as abnormal returns or accounting performance measures such as ROA. Our review encompasses research that addresses the general question shown in Equation (1): Can differences in firm performance be explained by differences in IT Investments?
Performance = f (IT) (1)
We present a general framework for analyzing this research in Figure 1. The top portion of Figure 1 shows that IT has a direct or indirect effect on business processes, which together determine the overall performance of the firm. An example of a direct effect is improving inventory management, which reduces inventory levels, inventory holding costs, waste, and spoilage. An example of an indirect effect is improving decision making by having information from a new IS that was previously unavailable.
The bottom half of Figure 1 shows how researchers have measured IT, business process performance, or firm performance. Generally, investments in IT have been examined three ways: (1) differences in the amount of money spent on IT, (2) the type of IT purchased, (3) how IT assets are managed. We refer to these as IT spending, IT strategy, and IT management/capability.
Researchers who quantify the explanatory variables based on IT spending have looked at total IT spending, IT training expenditures, and IT staff expenditures. Researchers who examine IT investments using IT strategy usually examine IT deployments such as type of system (e.g., electronic commerce or ERP), performance advantages from early deployment of technology (first-mover advantages or proprietary technology advantages), or IT-enabled strategies such as improved product quality due to new IT. Researchers who quantify the explanatory variables based on IT management or capability examine differences in the emphasis on IT or level of ability within an organization. For example, researchers classify firms as successful users of IT, or as those that have systems personnel in upper management positions.
The relation between IT and firm performance follows three paths of Figure 1. Path 1 is a direct link between IT and overall firm performance, bypassing the effect of IT on business processes. In this research, researchers usually measure firm performance using market measures or accounting measures. Market performance measures include event studies (short-window abnormal stock returns), market valuation of common equity and Tobin's q. Accounting performance measures include ratios such as ROA, ROE, and ROS. All studies that use market performance measures are by default investigating Path 1 since there are no market measures of business processes.
Path 2 of Figure 1 describes the relation between IT and business process performance. Business process performance measures include gross margin, inventory turnover, customer service, quality, efficiency, and other cost, profit margin, and turnover ratios. Path 3 shows how these process measures combine or interact to determine overall firm performance.
The link between IT and performance depends on other factors, which we refer to as Contextual Factors in our framework. Path 4 of Figure 1 presents the Contextual Factors that link business processes and firm performance measures. Examples of Contextual Factors include firm size, industry, financial health of the firm, growth options, and IT intensity. As shown in Figure 1, these Contextual Factors affect business processes through Path 4 and overall firm performance through Path 5.
We divide the studies into the three general categories used to frame the differences in IT investments, IT spending, IT strategy, and IT management/capability. Figure 2 contains a summary of each reviewed study, including the authors, publication date, focus of the study, measures of business processes or firm performance, summary of findings, and investigated paths from Figure 1.
IT Spending
Stock Market Reactions to Announcements of IT-Related Expenditures
In this section we investigate Paths 1 and 5 of Figure 1 by examining five relevant event studies. One market-based method of determining whether IT investments pay off is to see if shareholders believe IT investments are value-relevant. Event-study methods can be used in an IT context to study the market reactions to salient IT events. One such event is a press release announcement of an IT investment. Creative and careful research designs allow researchers to investigate which attributes of IT investments influence shareholders' interpretations of such announcements as measured by abnormal movements in the investing firm's stock price.
The first two studies examine Path 1 of Figure 1 by considering the path between IT spending and firm performance. The latter three studies focus on contextual factors (Path 5 of Figure 1) such as size, time, industry, industry-strategic-IT role, and type of IT investment. They find evidence that contextual factors are critical in understanding the relation between IT investments and the related stock market reaction.
In the first event study of market reactions to IT investment announcements, Dos Santos et al. (1993) find no abnormal returns for the overall sample of 97 IT investments from the finance and manufacturing industries from 1981 to 1988. However, the authors observe a positive stock market reaction to what the authors characterize as innovative IT investments." This suggests that stockholders carefully consider the nature of announced IT investments and the likely impact of such investments on a firm's net present value of future cash flows, and then buy or sell accordingly.
Dos Santos et a!. (1993) define an innovative IT investment as a first use of a technology, a new product or service, or a new IT application within an industry. While "first-to-market" is generally a highly regarded competitive strategy, being first-to-market does not necessarily guarantee ultimate marketplace success, particularly with new technologies. Characterizing an IT investment as innovative, thus, may very well be capturing other, more generally applicable, contextual elements under which IT investments promote positive returns.
Chatterjee, Pacini, and Sambamurthy (2001) study whether there is a difference in stock market reaction to...
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