Week 1 Reading Summary – Ho et al. (2017) – Xi Wu

Ho, J., Tian, F., Wu, A., & Xu, S. X. (2017). Seeking value through deviation? Economic impacts of IT overinvestment and underinvestment. Information Systems Research, 28(4), 850-862.

Information technology (IT) investment decisions are of continuing strategic importance to firm. Under Red Queen competitive pressures, each firm’s performance depends on exceeding the actions of its rivals. This logic is useful but underresearched in the context of IT investment and its economic impacts.

This paper addresses the economic impacts of information technology overinvestment and underinvestment decisions. Hypothesis in this work draws on the view of Red Queen competition in conjunction with institutional theory. It argues that there is an effect of deviation on competitive advantage and an effect of deviation on legitimacy. Combining the two effects, a nonlinear relationship between firm performance and over- or under investment is expected (Hypothesis 1). In addition, drawing on the idea of management control mechanisms, the nonlinear firm performance impacts are conditional on ownership concentration (Hypothesis 2).

The authors use Tobin’s q to indicate firm performance, firm IT investment deviation is the difference between a firm’s IT capital and Industry IT. Sample set covers S&P 500 firms during 2001–2006. Firstly, ordinary least squares regression is applied. Then, to handle the possible endogeneity problem caused by selection bias, this paper uses Garen’s two-stage approach to model it. Another two partial adjustment models are applied to help address the dynamics of IT investment.

From the four models result, this paper finds that, on average, there is a positive relationship between a firm’s overinvestment in IT and Tobin’s q, although the relationship attenuates at higher levels of over-investment. However, on average, there is no relationship between a firm’s underinvestment in IT and its Tobin’s q. In addition, family ownership positively moderates the performance impact of underinvestment. These findings partially support hypotheses proposed.