An empirical examination of the information content of electronic data interchange investment announcements

Despite the large increase in information technology (IT) capital investments made during the 1980s and 1990s, there is little evidence that firms actually benefit from such investments. Moreover, there is mixed evidence about the reaction of financial markets to these investments. Much controversy exists about the impact of IT investments on organizational strategic and economic performance. Drawing on efficient market theory and signaling theory, this study examines the relationship between IT investments and firm performance. Using archived cross-sectional data, this field study uses market measures and accounting measures to investigate the information content of electronic data interchange (EDI) investment announcements.;The event study methodology was used to empirically investigate how capital markets respond to firms announcing investments in EDI. Research findings provided mixed results over the two-day event window, with abnormal returns being largest on the event day. Overall results were insignificant; however, abnormal returns for small firms were found to be positive and statistically significant (alpha = 0.01) on the event day, while abnormal returns for large firms were negative and statistically insignificant on the event day. Further analysis revealed a marginally significant (alpha = 0.05) difference between abnormal returns for small firms and large firms over the two-day event window. These significant findings are consistent with the presence of asymmetrical information between small firms and the capital markets. The difference observed in this study between service firms and non-service firms was not significant.;This study contributes to accounting research by providing empirical evidence about the underlying association between abnormal returns and IT investment announcements. The current study complements extant information systems research by integrating efficient market theory and signaling theory into the ongoing investigation of how IT investments affect firm performance.