Abstract

Information Technology (IT) event studies often focus on announcement period returns based on the capital asset pricing model (CAPM). This approach may have two sets of key limitations. First, the use of announcement period assumes the market is efficient in pricing the event. However, a firm not be aware of the organizational changes required for success of the IT event, or may not have the incentive to disclose such information for competitive reasons. Thus we expect many IT events to be characterized by low information disclosure, which may impede efficient pricing by financial markets. Second, IT event studies largely rely on CAPM, which only considers systematic risk, and assumes that idiosyncratic or firm-specific risk is eliminated through efficient diversification. Yet one of the foundations of IS is that IT matters, largely because firms have different capabilities to develop, deploy and manage IT resources. Thus there is a disconnect between a basic theoretical tenet of the IS field and the methodology deployed to assess the value of IT events. We develop a framework involving the maturity of the IT event and the scope of complementary changes to assess the extent of information disclosure and idiosyncratic risk. We empirically illustrate our approach for the case of large scale IT and IT-enabled outsourcing.

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