Reexamining the Market Value of Information Technology Events

The widespread use of announcement period returns to assess the financial impact of information technology (IT) events implicitly assumes that the market can completely price IT investments during the announcement period. However, some studies in strategy and information systems have suggested that long-term abnormal returns may be a more appropriate measure of the value of IT events. To reconcile these streams of research, we develop and test an exploratory framework involving the maturity and scope of an IT event to assess the suitability of short-versus long-term abnormal returns. We conceptualize event maturity in terms of diffusion of the technology or phenomenon, and scope as the extent of complementary organizational changes that need to be implemented and managed. We posit that because of lack of widespread knowledge of best practices and cases of success and failure in a period of low technological maturity, the market may find it difficult to price such an event completely during the announcement period. Similarly, the challenge of acquiring and interpreting information on a firm’s capability to manage wide scope of change may be an impediment to pricing high-scope events. We test our framework using a sample of 642 large outsourcing contracts and 1,700 electronic commerce initiatives. We empirically demonstrate that announcement period returns are indeed a complete measure of event value for cases characterized by high maturity and low scope; however, long-term abnormal returns are realized for events involving low maturity and/or high scope, which questions the validity of announcement period returns. Our results are robust to alternate model specifications. We conclude with a discussion of the implications for theory and practice, and directions for future research.