Week3_Dewan and Ren (2011)_Yaeeun Kim

IT investment as a return or risk. How does a firm increase return and decrease risk by using boundary strategies: vertical integration and diversification.

From the findings, this paper suggests that suitable boundary strategies can moderate the impact of information technology (IT) on firm performance, increasing return and decreasing risk. This tendency is apparent especially when the firm is categorized as service industry, with high levels of IT investment intensity, and in more recent time periods.

Diversification refers to the extent to which the firm chooses to operate in multiple lines of business or product markets, whereas vertical integration is the extent to which value chain activities are conducted inside the firm as opposed to contractually with business partners.

Vertical integration (VI_it) is measured with two ways: The first measure is the ratio of value added to sales (Adelman, 1955). Second, an alternate measure was used for robustness, which is less sensitive to industry differences (Fan and Lang, 2000; Ray et al., 2006).

Key dependent variables are firm return and firm risk, and the set of predictor variables includes IT capital, degrees of diversification and vertical integration, along with other firm and industry control variables.

Among key independent variables, a level of diversification (DIV_it) was analyzed with the entropy measure (Palepu, 1985).

From the analysis, diversification is negatively associated with both returns and risk at 1% significance level, and vertical integration is positively associated with return but negatively associated with risk model. For the individual interaction term of IT with diversification or IT with vertical integration is positive in return model and negative in risk model, confirming the significant moderating impact of firm boundaries on firm risk-return performance.