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This paper compares the mean and variance of cumulative abnormal returns following
announcements of two types of information technology (IT) investments: those which
entail the "exploitation" of firm's current capabilities vs. those which involve the
exploration of new capabilities. The paper addresses two understudied questions in
research on the contribution of IT to firm performance: the contingent nature of those
contributions and the impact on risk (or variance), as well as on return (mean). To
examine these questions I first performed a standard event study analysis on a sample
of 150 announcements of IT investments made by 59 publicly-traded retailers between
the years 1990-1997. I performed two types of multivariate regression analysis on the
event returns: ordinary least squares (to assess the impact of the two types of
investments on the mean level of returns) and multiplicative heteroscedastic regression
(to determine the impact on the variance of the returns). The results indicate that, as
expected, IT investments "exploitative" IT investments have the same mean as, yet
lower variance than, abnormal returns associated with "exploratory" IT investments.
Somewhat unexpectedly, I found that both types of IT investments had a significantly
negative impact on the market value of the firm. Taken together, these findings suggest
that the characteristics of IT investments themselves, as well as the industry and
strategic context within which they were made, are important determinants of the
market value of the firm. As such, the results of this study should be of interest to
researchers interested in the contribution of IT to firm performance and to MIS
professionals both in the retailing sector, in particular, and other service sectors, more
generally. |
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