Anderson, Banker, and Ravindran (2006) Siddharth Bhattacharya

The paper asks the important question of whether IT does create value that is reflected in the market value of firms and in their future profitability. This question has been hard to address and there have been varying viewpoints about this topic. Proponents argue that companies can make innovative use of IT in ways that create value by taking advantage of unique resources of a firm. Critics, on the other hand argue that IT is easily replicable and cannot provide sustained competitive advantage as profits obtained from improved business would be competed away. Further, another line of thinking is that firms may develop specific set of architecture and skills that are not easily replicable and thus IT capabilities may themselves become a strategic resource. The paper wants to resolve this conundrum by utilizing the Y2K bug situation in 2000 that had forced IT firms to think about their existing  IT strategies seriously.

The paper hypothesizes that there is a positive association between shareholder value and Y2K spending and this is more pronounced in the transform than the informate than the automate industries respectively in that order. It also hypothesizes that there is a negative association between shareholder value and industry level spending on Y2K and that there is a positive association between earnings in future periods and Y2K spendings that are higher for firms in transformate industries versus the other industries. The authors employ a market valuation framework similar to that applied by Lev and Sougiannis’ (1996). The novelty of the method is the use of earnings in one period as predictors of earnings in the future. The results show that firms that spent more in the Y2K period experienced the benefits of improved earnings and increased firm value. These benefits were more pronounced in transform industries versus the other two. These companies, in the long run, were more flexible and were faster to adopt upcoming trends in e-business etc, thus providing them with more benefits. The authors also carry out bunch of robustness checks and rule out endogeneity concerns (using 3SLS etc) keeping the results consistent.