Information Technology and the Volatility of Firm Performance

This study investigates the impact of IT investments and several contextual variables on the volatility of future earnings. We find evidence that IT investments strongly increases the volatility of future earnings and that four contextual factors - industry concentration, sales growth, diversificati...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Hunter, Starling, Kobelsky, Kevin, Richardson, Vernon J
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2004
Subjects
Information technology
Volatility
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Summary:This study investigates the impact of IT investments and several contextual variables on the volatility of future earnings. We find evidence that IT investments strongly increases the volatility of future earnings and that four contextual factors - industry concentration, sales growth, diversification, and leverage - strongly moderate IT's effect on earnings volatility. It is notable that while the main effect of IT spending on earnings volatility is strongly positive, not all of the moderators are. This suggests that there are conditions under which the positive risk-return relation can be either offset or even reversed. Taken together, these results suggest an explanation for what has recently been termed the "new productivity paradox", i.e. the apparent under-investment in information technology despite evidence of highly positive returns for doing so.