The value implications of information technology spending

Previous research has found high returns to investment in IT but has not considered whether firms over- or under-invest in IT. In this dissertation, we propose a valuation model that relates Tobin's q to a concave specification of the impact of IT spending. Consistent with diminishing returns to IT investment, the estimated coefficient on the concavity term is positive and the estimated coefficient on the linearity term is negative. By specifying the relation between firm value and IT spending in this manner, we are able to assess whether individual firms over- or under-invest in IT. Our findings are provocative: most firms under-invest in IT.; Previous research has interpreted positive stock price reactions to announcements of IT investments as evidence that expected future earnings increase with new IT investment, but no direct link has been made between IT spending and actual future earnings. In this dissertation, we address how IT impacts a firm's future performance over time. We estimate empirical models that relate future earnings to IT spending in period t and earnings information available at the end of period t. We find strong evidence of a positive association between future earnings and IT spending in period t. We finds that the relation between future earnings and IT spending are different across industries depending on the business role that IT plays in those industries. We use a portfolio analysis to investigate whether stock prices fully reflect the value of IT spending and find that they do not.