IT Investment and Firm Risk: The Risk Paradox?

Measuring the impact of information technology (IT) investment on firm performance is a long standing issue among both information systems (IS) and researchers in other disciplines. Most research to date on the impact of IT spending on firm performance has focused on the returns that IT investments can provide to firms. Initial studies showed no impact of IT investment and more recent studies have shown an abnormally positive influence. Given the mixed results to date an open question is what is the impact of IT investment on firm performance? Economics has shown a tradeoff between returns and risk, yet most studies to date have not measured risk. Using firm-level IT spending data this research-in-process paper shows that higher levels of IT spending increase the volatility of firm cash flows and earnings, as financial theory suggests, but also reduces the impact of this volatility on in the financial markets.