Week 1 Reading Summary (HK)

Anderson, M.C., Banker, R.D., and Ravindran, S. (2006) “Value Implications of Investments in Information Technology,” Management Science (52:9) pp. 1359-1376.

Anderson, Banker, and Ravindran (2006) capitalized on the unique Y2K bug situation to further the debate on the value of IT. Skeptics of IT spending argue that companies overspend on IT (Carr, 2004) based on the false belief that IT can provide a sustainable competitive advantage. Proponents of this belief feel that companies should wait to allow others to absorb the cost of IT and simply mimic successful implementations. On the contrary, IT supporters argue that IT creates value by connecting consumers and suppliers in a value driven way. This debate has been ongoing due to the difficulties that arise when attempting to empirically address IT performance and value; past research has relied on survey information (Bharadwaj et al., 1999; Brynjolfsson et al., 2002) or public announcements (Dos Santos et al., 1993; Im et al., 2001; Chatterjee et al., 2001). However, Anderson et al. (2006) capitalized on the U.S. SEC’s mandate to disclose Y2K preparations in order to gain unique insight into this ongoing debate.

Following a market valuation framework similar to Lev and Sougiannis’ (1996), Anderson et al. (2006) employed empirical models which related the combination of firms’ current book values and earnings, along with other value-relevant variables, to firms’ market values (i.e. prevailing stock prices). Though some critics proposed that organizations were overzealous with their IT spending in light of Y2K (Kong and Seipel, 2000), Anderson et al. (2006) found companies who spent more in the Y2K period experienced the benefits of improved earnings performance and increased value. These benefits were further realized in transformational industries, or those where IT has the potential to alter traditional business processes and relationships. Effectively, companies that embraced IT upgrades in response to the Y2K bug positioned themselves so that they could realize the benefits of emerging e-business applications.