The Effects of Firm Characteristics on Investor Reaction to IT Investment Announcements

This paper examines the effects of firm characteristics measured by price-to-book (PB) ratio, free cash flow (FCF), and variability of daily stock return (VDR) on investor reaction in the stock market to IT investment announcements. In contrast to previous studies, which focused exclusively on whether or not IT investment announcements led to an abnormal return in the market, this study investigates the extent to which firm characteristics influence the direction and magnitude of cumulative abnormal returns (CARs). Although these firm characteristics critically affect investor reaction to IT investment announcements, existing event studies in the IT literature pay scant attention to them. In spite of the same IT investment (say, developing an ERP system) announcement, the market reaction would vary due to the heterogeneity in financial situations under which the firm operates before the announcement. Contrary to previous studies, the results suggest that IT investment announcements result in significant abnormal returns around the event announcement date when only the announcements made by investing firms were considered. We provide some empirical evidence that investments in IT can have a great impact on firm value. With regard to the firm characteristics in relation to CARs, PB ratio, and variability of daily stock returns significantly affect the investors’ reaction to IT investment announcements. Finally, this study shows IT investment decision makers the implications of drawing greater attention from investors when making IT investment announcements.