Sury Ravindran

Value Implications of Investments in Information Technology

The year 2000 (Y2K) countdown provided a uniquely visible instance of spending on information technology (IT) by U.S. companies. With public attention riveted on potential Y2K malfunctions, managers were forced to evaluate their IT and make decisions about whether to modify or replace existing systems. In the aftermath of Y2K, critics charged that the problem was overblown and that companies overspent on IT. In contrast, we posit in this paper that efforts companies made to renew and upgrade their IT may have positioned them to take advantage of new e-business applications. As Y2K approached, managers could invest opportunistically in IT, which would enable them to connect with customers and suppliers in new ways. Contrary to the alleged overspending, we find that firm value increased, on average, with Y2K spending by Fortune 1000 companies. In particular, higher firm value and subsequent earnings were associated with Y2K spending for firms in industries where IT was considered to have a transforming influence---altering traditional ways of doing business by redefining business processes and relationships. We also test whether the positive association between firm value and Y2K spending diminished with Y2K spending by industry peer firms, but we do not find support for this relative investment hypothesis.

The new productivity paradox

High valuation multiples on IT spending suggest that companies are underinvesting in IT.