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The Value of Disclosure of Information Technology Investments
Charlene Henderson, University of Arkansas
Kevin Kobelsky, Baylor University
Vernon J. Richardson, University of Arkansas
Rodney E. Smith, California State University Long Beach
ABSTRACT. The FASB conceptual framework suggests that financial reporting should provide information to users to assess the amounts, timing and uncertainty of future cash flows. This study examines the extent to and manner in which market participants’ decisions reflect information about firms’ IT spending. We provide evidence that firm-specific IT expenditures are value relevant, assist in predicting the amounts and uncertainty of future cash flows and are useful to investor. Market participants making decisions with detailed, firm-level disclosure about IT investments were able to generate superior returns relative to those available using only industry level information on IT spending. The analysis evaluates the implications for the average investor who, in the current marketplace and under current accounting guidelines, lacks a public source of information about firm-level IT investment. This suggests disclosure may be appropriate.
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