Riding the Waves of Technology through the Decades: The Relation between Industry Information Technology Intensity and the Cost of Equity Capital

• In Event: External Reporting Quality and Technology Investments

Abstract

This paper contributes to the literature by furthering our understanding the effects IT has on a firm's performance by examining the industry cost of equity capital. We find that industry IT Intensity is negatively related to the industry cost of equity capital indicating that industries with higher levels of IT investment have lower cost of equity capital. We also find that the relation between IT intensity and cost of equity capital changes over time. Initially, investors viewed IT investments as risky ventures and required higher levels of cost of equity (or higher return on their investment) for those industries investing in IT. However, as IT became more reliable, more cost effective, and had the ability to transform businesses beginning in the 1980s, investors viewed IT Intensity as a positive business strategy, reducing their required cost of equity capital (or lower return on their investment). The results of our study are independent of industry affiliation. Thus, IT intensity is an important factor in helping achieve financial performance and is a key factor for business success.

Authors

• Vincent J Shea, St. John's University

• Kevin Dow, NA - No Affiliation

• Marcia Weidenmier Watson, Mississippi State University