Week 1 Reading Summary -Leting Zhang
Kim, K., Mithas, S., & Kimbrough, M. (2017). Information technology investments, and firm risk across industries: Evidence from the bond market.
When firms in U.S. make decision in IT investment, it is necessary for them to evaluate the impact on their bond, because bond markets are the single laregest financial sources for U.S. firms. However, how bondholders view IT investment is little known. This paper tends to investigate the problem from two perspectives : 1. the association between IT investments and two measures, initial bond rating and yield spreads, for newly issued bonds; 2. how these associations vary across industries.
The paper examines research questions through the lens of real option thoery (e.g. Benorach 2002; Fichman et al. 2005) . Decision maker face the trade off betweem the benefits and risks IT may bring. In the context of this paper, bondholders play the role of decision maker, on one hand, IT investment may increase cash flow of a firm, on the onther hand, they also consider several riskiness associated with IT. Furthermore, the paper focuses on three broad industry categories based on the differing strategic roles of IT (Anderson et al. 2006; Banker et al. 2011) : 1. automate, 2. informate, 3. transform. It discusses industry heterogeneity in IT investment risks which are classified into (Benaroch 2002) : 1. firm-specific risks, 2. competition risks, 3. market risks. It points out transform industries are more likely to face higher risk from IT investment than other two thus negatively influence the bond evaluation.
It uses data from financial database and InformationWeek database. Empirical models are established to examine the research questions.
The main findings are bondholders perceive the impact of IT ivestments on bond ratings and yield spreads differently across industries. They view IT investment in automate and infomate industires more favorably than those in transform industries. Becuase bondholders’ aversion to the riskiness and the lack of collateralizability of IT investments.