Abstract

In this study, we investigate the association between information technology (IT) spending and future firm performance. Critics contend that greater expenditures on IT rarely lead to superior financial results, citing studies that compare firm performance to current IT spending. But valuation and stock-return studies have found a positive association between the market value of firms and their current IT spending or announcements of new IT initiatives. These observed relations are interpreted to mean that expected future earnings increased with new IT spending, consistent with a delayed impact of new IT on earnings. If actual future earnings increased with IT spending in a period, then a positive association between IT spending and future earnings should be directly observable. We describe a methodology for studying the association between IT spending in period t and earnings in future periods and evaluate this association for a sample of firms based on their IT spending during the years 1990 through 1996. We divide our sample into firms according to the business role IT played in their industries during this time period. For firms in industries where IT played an informating role (improved information flows throughout organizations), we find a strong positive association between future earnings and IT spending. The magnitude of the association increased during the first three years after the IT spending occurred and then began to taper off. For firms in industries where IT played an automating role (facilitated automation of business processes), we find a smaller but significantly positive association between future earnings and IT spending that lasted at least four years after the year the IT spending occurred.

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