Information Technology and Firm Boundaries: Impact on Firm Risk and Return Performance

  • Authors:

  • Sanjeev Dewan;Fei Ren

  • Affiliations:

  • The Paul Merage School of Business, University of California at Irvine, Irvine, California 92697;Guanghua School of Management, Peking University, Beijing 100871, China

  • Venue:
  • Information Systems Research
  • Year:
  • 2011

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Abstract

In this paper, we empirically investigate the impact of information technology (IT) investment on firm return and risk financial performance, emphasizing the moderating role of the firm boundary strategies of diversification and vertical integration. Our results indicate a sharp contrast between the direct and interactive effects of IT on both the return (profitability) and risk (variability of returns) dimensions. Although the direct effect of IT capital is to increase firm risk for a given level of return, we find that suitable boundary strategies can moderate the impact of IT on firm performance in a way that increases return and decreases risk, at the margin. This interaction effect is strongest in service firms, in firms with high levels of IT investment intensity, and in more recent time periods. Our results are robust to alternative proxies for firm risk, including an ex ante risk measure (variability of analysts' earnings estimates), and alternative risk-return specifications. Put together, our results provide new insights into how IT and firm boundary strategies interact to affect the risk and return performance of firms.