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Exploring the capital market effects of IT capability: the case of ownership structure

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Abstract

Grounded in the debate on the business value of information technology (IT), research on IT capability is an important research stream since many years. Several studies highlight the strategic importance when studying the effects of IT capability on performance and other outcomes. Although firm-level effects are well understood, the effects on capital markets, especially investors, have rarely been explored. We fill in this gap and extend current research on IT business value by arguing that due to the multiple benefits of IT capability for organizations, institutional investors recognize and value a firm’s IT capability as an intangible asset and incorporate it into their investment decisions. We make use of the annual InformationWeek 500 ranking and accounting data to analyze the effect of IT capability on firms’ ownership structure. Our results provide evidence that firms possessing a superior IT capability are held by a higher share of long-term oriented institutional investors that trade less frequently. These findings are robust to alternative sampling strategies, industry differences, and the consideration of firm performance effects. We outline directions for further research and practical implications for executives and investors.

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Notes

  1. The terms investor and owner are used synonymously in the following and refer to stock ownership in public corporations.

  2. The SEC rule 13F defines institutional investors as those institutions that administer more than $100 million in equity or whose holdings exceed $200.000 in market value or 10.000 shares. Those institutions encompass insurance companies, banks, mutual funds, and pension funds that manage and invest money on behalf of others. Institutions holding shares for own interest, such as brokerage firms or arbitrageurs, do not fall within the scope of rule 13F (Bushee 1998; Wines 1990).

  3. Besides availability of standardized and longitudinal data, archival data is generally unbiased and allows large sample sizes.

  4. Furthermore, Rai et al. (1997) found the ranking to be “consistent with data from other secondary sources, such as IDG and BEA”. Banker et al. (2011, 2000, 2003) provide several other benefits and limitations of using the IW ranking.

  5. It has to be noted, that firms ranked by InformationWeek are included by self-selection. Therefore, the control sample (Group 2) most probably contains companies that possess a superior IT capability as well. In that case, the average values of the control sample would be biased towards the ranked companies (Group 1). Thereby, the control group is more conservative and results are more robust and reliable.

  6. See Muhanna and Stoel (2010) for a discussion on the benefits of lagged performance measures.

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Schäfferling, A., Wagner, HT. Exploring the capital market effects of IT capability: the case of ownership structure. J Bus Econ 85, 455–477 (2015). https://doi.org/10.1007/s11573-014-0757-x

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