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The Effect of Information Technology on Cost of Capital: An Industry Level Analysis
Vincent Shea,
Kent State University
Kevin Dow, Kent State University
Pervaiz Alam, Kent State University
ABSTRACT. In this paper, we examine the effect of information technology (IT) on the cost of capital of industries. We show that IT, measured as IT intensity, drives the industries’ cost of capital, especially after the productivity paradox period. Specifically, the results show that IT intensity is significantly related to cost of capital. In addition, an IT intensity-time interaction term is tested and found negatively significant. This interaction term suggests IT decreases the industries’ cost of capital over time after the productivity paradox period. Further, we also test for the significance of the informate IT strategic role on the cost of equity capital. However, there is a lack of support for the informate IT role. This paper expands the literature in understanding the role of IT and accounting information. In addition, this paper contributes in addressing the effect of IT on industry’s risk.
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