How Do Investors Value IT? An Empirical Investigation Of The Value Relevance Of IT Capability

Drawing on the resource-based theory of the firm and using Ohlson's (1995) residual income valuation framework, this paper investigates the relationships between IT Capability, IT spending and market value. The author examines the role of industry context by empirically investigating the moderating role of three industry characteristics (munificence, dynamism, and complexity). A firm's IT Capability refers to its capacity to leverage the potential of information technology. Using a matched sample design methodology and publicly available ratings, and after controlling for firm-specific determinants as well as industry fixed-effects, the author finds that IT capability is value relevant; i.e., the stock market values of firms with superior IT Capability are both economically and statistically higher than the values of a control sample.