ERP Investments and the Market Value of Firms: Toward an Understanding of Influential ERP Project Variables

  • Authors:

  • C. Ranganathan;Carol V. Brown

  • Affiliations:

  • Department of Information and Decision Sciences, Liautand Graduate School of Business, University of Illinois at Chicago, 601 South Morgan Street, Chicago, Illinois 60607;Information Systems Department, Kelley School of Business, Indiana University, 1309 East 10th Street, Bloomington, Indiana 47405

  • Venue:
  • Information Systems Research
  • Year:
  • 2006

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Abstract

This study contributes to the growing body of literature on the value of enterprise resource planning (ERP) investments at the firm level. Using an organization integration lens that takes into account investments in complementary resources as well as an options thinking logic about the value of an ERP platform, we argue that not all ERP purchases have the same potential impact at the firm level due to ERP project decisions made at the time of purchase. Based on a sample of 116 investment announcements in United Statesbased firms between 1997 and 2001, we find support for our hypotheses that ERP projects with greater functional scope (two or more value-chain modules) or greater physical scope (multiple sites) result in positive, higher shareholder returns. Furthermore, the highest increases in returns (3.29) are found for ERP purchases with greater functional scope and greater physical scope; negative returns are found for projects with lesser functional scope and lesser physical scope. These findings provide empirical support for prior theory about the organizational integration benefits of ERP systems, the contribution of complementary resource investments to the business value of IT investments, and the growth options associated with IT platform investments. The article concludes with implications of our firm-level findings for this first wave of enterprise systems.