Sanjeev Dewan

Investigating the Risk--Return Relationship of Information Technology Investment: Firm-Level Empirical Analysis

This paper develops empirical proxy measures of information technology (IT) risk and incorporates them into the usual empirical models for analyzing IT returns: production function and market value specifications. The results suggest that IT capital investments make a substantially larger contribution to overall firm risk than non-IT capital investments. Further, firms with higher IT risk have a higher marginal product of IT relative to firms with low IT risk. In the market value specification, the impact of IT risk is positive and significant, and inclusion of the IT risk term substantially reduces the coefficient on IT capital. We estimate that about 30% of the gross return on IT investment corresponds to the risk premium associated with IT risk. Taken together, our results show that IT risk provides part of the explanation for the unusually high valuations of IT capital investment in recent research.

Social media, traditional media, and music sales

Motivated by the growing importance of social media, this paper examines the relationship between new media, old media, and sales in the context of the music industry. In particular, we study the interplay between blog buzz, radio play, and music sales at both the album and song levels of analysis. We employ the panel vector autoregression (PVAR) methodology, an extension of vector autoregression to panel data. We find that radio play is consistently and positively related to future sales at both the song and album levels. Blog buzz, however, is not related to album sales and negatively related to song sales, suggesting that sales displacement due to free online sampling dominates any positive word-of-mouth effects of song buzz on sales. Further, the negative relationship between song buzz and sales is stronger for niche music relative to mainstream music, and for less popular songs within albums. We discuss the implications of these results for both research and practice regarding the role of new media in the music industry.

Complementarities in the Diffusion of Personal Computers and the Internet: Implications for the Global Digital Divide

This paper studies the cross-country diffusion of personal computers (PCs) and the Internet, and examines how the diffusive interactions across these technologies affect the evolution of the global digital divide. We adopt a generalized diffusion model that incorporates the impact of one technologys installed base on the diffusion of the other technology. We estimate the model on data from 26 developing and developed countries between 1991 and 2005. We find that the codiffusion effects between PCs and the Internet are complementary in nature and the impact of PCs on Internet diffusion is substantially stronger in developing countries as compared to developed ones. Furthermore, our results suggest that these codiffusive effects are a significant driver of the narrowing of the digital divide. We also examine the policy implications of our results, especially with respect to how complementarities in the diffusion of PC and Internet technologies might be harnessed to further accelerate the narrowing of the global digital divide.

Risk and Return of Information Technology Initiatives: Evidence from Electronic Commerce Announcements

This paper takes an event study approach to jointly examine the wealth and risk effects associated with electronic commerce announcements, contributing to the emerging research on the riskiness of IT investments and the trade-off between risk and return in the information systems literature. We estimate a generalized event study model that allows for both systematic and unsystematic risk changes on data collected for electronic commerce announcements in the 1996--2002 time frame. A striking result emerging from our analysis is that wealth effects are not significant after controlling for contemporaneous risk changes. Both total and unsystematic risk show a significant postevent increase in 1998 and 2000, whereas systematic risk adjusts downward in 1996 and 2002. Put together, our results contribute to our nascent understanding of how IT initiatives affect the risk-return profile of the firm.

Research Note---Music Blogging, Online Sampling, and the Long Tail

Online social media such as blogs are transforming how consumers make consumption decisions, and the music industry is at the forefront of this revolution. Based on data from a leading music blog aggregator, we analyze the relationship between music blogging and full-track sampling, drawing on theories of online social interaction. Our results suggest that intensity of music sampling is positively associated with the popularity of a blog among previous consumers and that this association is stronger in the tail than in the body of music sales distribution. At the same time, the incremental effect of music popularity on sampling is also stronger in the tail relative to the body. In the last part of the paper, we discuss the implications of our results for music sales and potential long-tailing of music sampling and sales. Put together, our analysis sheds new light on how social media are reshaping music sharing and consumption.

Pricing Computer Services Under Alternative Control Structures: Tradeoffs and Trends

This paper extends the analysis of the long-run pricing and capacity decision problem for shared computer services by Dewan and Mendelson 1990 and makes two further contributions. First, we show that simple marginal capacity cost pricing is often optimal in the absence of private user information, and it outperforms cost recovery and profit center pricing methods. Second, we provide insights into the implications of declining computing costs on the tradeoff between capacity costs and user time. In equilibrium, expected user delay costs are bounded by capacity costs due to the substitution of cheaper information processing capacity for valuable user time.

Industry-Level Analysis of Information Technology Return and Risk: What Explains the Variation?

Abstract Motivated by the wide dispersion in the returns on the use of information technology (IT) across industries, we conduct an industry-level examination of IT return and risk, focusing on the moderating role of industry competition, regulation, and technological change. We address the following research questions: What is the impact of IT investment on the return and risk dimensions of industry financial performance? How do industry characteristics moderate the relationship between IT investment and industry performance? Our analysis of these questions finds that higher levels of industry competition are associated with higher IT productivity (contribution of IT to value-added output), lower IT profitability (contribution of IT to industry average return on assets [ROA]), and higher IT risk (contribution of IT to ex ante variability of ROA). This is consistent with the notion that competition induces riskier IT investments, despite the fact that returns tend to be competed away. Higher levels of industry regulation are associated with lower IT returns in both productivity and profitability, but also lower IT risk. Finally, a higher rate of technological change induces both higher IT returns and higher IT risk. A variety of tests indicate that our results are robust. Our results shed light on factors that drive variation in IT performance across industries, and provide useful industry-level performance benchmarks of the return and risk impacts of IT investments.

Information Technology and Trader Competition in Financial Markets: Endogenous Liquidity

This note integrates the models of Dewan and Mendelson (1998) (DM) and Kyle (1985), extending the DM analysis of time-based competition in financial markets to the case of endogenous liquidity. The results enable us to examine the link between information technology investments, trading strategies, and liquidity.

The Internet Channel Revolution: The Case of Charles Schwab

The Internet has spread like wild fire in the discount brokerage industry. By the end of 1998, more than ninety firms were offering online trading to over 8 million customer accounts, with commissions as low as

Managerial incentives and the value of information systems timeliness

5 per trade, and online trading accounted for 13.7% of total equity trading volume. The online volume leader is Charles Schwab, with almost a third of the market, and a trading volume that roughly equals that of its next three competitors combined. Most trades come to Schwab through the Internet channel, and Web investors account for more than a third of Schwab’s customer assets. This chapter will use Schwab as a case study that illustrates the use of the Internet channel and the role of Information Technology (“IT”) and the Internet in the creation of value in financial services. We show how the Internet has come to the core of Schwab’s business strategy, and draw lessons from the Schwab experience to shed light on the broader impact of online trading on financial services ineustry.