Information systems investment evaluation

James Allen Connell, Louisiana Tech University


The objectives of the study were to determine whether an announced information system investment by a firm is associated with a change in shareholder risk and to determine whether firms which invest in information systems have similar patterns of change in operational efficiency as measured using financial ratios.

Several related articles have examined the importance of information systems to corporate performance. Assorted methods for measuring the value of an investment in an information system have been examined, with conflicting results. This manuscript resolves the controversy created by these multiple methods of evaluating information system performance so as to add to the knowledge in the fields of finance, accounting and information systems.

A broad-based test of the impact of an information system investment on shareholder wealth is undertaken to better understand how investors perceive value to be affected when a firm invests in an information system. This dissertation extends previous work by considering the effect of the information system investment on several risk measures of the firm as reflected in the stock market and on a group of financial ratios.

A sample of firms reporting information system investments in their annual report or Form 10-K during fiscal year 1988 or 1989 was collected and matched with a control sample based on SIC industry code and pre-investment beta. The rates of return earned by stockholders in the year following the information system investment were compared to determine whether a statistically significant difference exists between the test group and the control sample. A similar series of tests was conducted using a selection of financial ratios in an attempt to identify the type of change associated with the information system investment.

The results suggest that an investment in an information system reduces the semivariance risk of the investing firm. This finding is not associated with a measurable change in operating efficiency.