Vernon J. Richardson
University of Kansas
Robert Zmud
University of Oklahoma
Abstract: We argue that IT expenditures are undervalued by stockholders due to the inherent uncertainty that accompanies IT expenditures and due to accounting standards that limit the extent of IT expenditure capitalization. We find, first, that the level of IT expenditures (IT intensity) is a predictor of future profitability and, then, find positive and significant stock returns accruing to the financial portfolio of firms with the highest IT intensity for the first three years following the IT expenditures. This suggests a systematic investor undervaluation for firms with high IT capability. The results suggest that stock market participants may have undervalued IT investment during the 1990¡¦s. We also consider the stock market returns to firms with differing levels of IT capability and find that firms with high IT capability are likely to have higher stock market returns following their IT investments, though these returns are strongest for firms with low IT intensity.
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