Analysis and impact of COVID-19 disclosures: is IT-services different from others?
| DOI | https://doi.org/10.1108/IMDS-04-2021-0239 |
| Published date | 26 October 2021 |
| Date | 26 October 2021 |
| Pages | 345-366 |
| Subject Matter | Information & knowledge management,Information systems,Data management systems,Knowledge management,Knowledge sharing,Management science & operations,Supply chain management,Supply chain information systems,Logistics,Quality management/systems |
| Author | Adrija Majumdar,Pranav Singh |
Analysis and impact of COVID-19
disclosures: is IT-services
different from others?
Adrija Majumdar and Pranav Singh
Indian Institute of Management Ahmedabad, Ahmedabad, India
Abstract
Purpose –There is ambiguity regarding whether coronavirus disease 2019 (COVID-19) is a boon or bane for
the IT services industry. On the one hand, it has created opportunities, especially with the growth of
collaborative technologies. On the other hand, many firms have reduced their IT budgets owingto the ongoing
recession. This study explores how IT firms have assessed the risk of the pandemic in the early days and
informed capital market participants. In addition, it examines the impact of such online disclosures on
information asymmetry.
Design/methodology/approach –The authors analysed annual reports of publicly listed firms in the USA
filed on the Securities and Exchange Commission website in 2020 and examined whether the disclosure
scenario of technology firms was different from that of the other industries. Moreover, the risk sentiment of
COVID-19-related disclosures was assessed by employing text analytics. Information asymmetry was
measured using the bid–ask spread.
Findings –Overall, it was found that IT services firms were less likely to discuss the COVID-19 pandemic in
their annual reports. Interestingly, it was observed that technology firms that chose to communicate about the
pandemic had a lower incidence of words related to risks. Furthermore, communicating about COVID-19 in
annual reports calms investors and improvesthe information asymmetry situation about the firm. Variation in
the severity of the pandemic and the responses of state governments was controlled for by employing state-
fixed effects in the empirical models.
Originality/value –The authors inform the literature on corporate disclosures and technology and highlight
the importance of effectively communicating about the pandemic.
Keywords Pandemic, Technology firms, Information disclosures, Risk sentiment, Information asymmetry
Paper type Research paper
1. Introduction
In addition to causing health hazards, the novel coronavirus has also disrupted global
economies. The United States economy shrank at a 32.9% annual rate between April and June
2020 because of the disruptions caused by the pandemic, making it the deepest decline since
the United States government started keeping records in 1947 (BBC, 2020). With overall
consumer and business spending declining, IT spending for 2020 was projected to fall by 3%
(Deloitte, 2020a,b). Because IT serves as an enabler of digital transformation, it is linked to
the health of other sectors. In many cases, when a crisis occurs, organisations conveniently
tend to reduce their IT spending. Furthermore, industry sectors such as tourism and
hospitality are severely affected by the pandemic. Thus, technology companies that cater to
the tourism sector face major losses and an adversely impacted workforce. For example,
TripAdvisor on 28 April announced that it was laying off more than 900 employees, a figure
representing roughly a quarter of its workforce. Some IT projects have been delayed because
of the pandemic. Consequently, some IT organisations are trimming their workforce to reduce
their operational costs (Livemint, 2020).
However, some IT services firms saw the pandemic as a major boost for their business
operations because many organisations were using their cloud services, video calling to
maintain “stay-at-home”work norms, etc. Online group communication has become the norm
COVID-19
disclosures
345
The authors are thankful to Dr. Rajendra Srivastava for the Seekedgar Search Facility.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/0263-5577.htm
Received 19 April 2021
Revised 14 September 2021
Accepted 11 October 2021
Industrial Management & Data
Systems
Vol. 123 No. 1, 2023
pp. 345-366
© Emerald Publishing Limited
0263-5577
DOI 10.1108/IMDS-04-2021-0239
across most business sectors, and firms providing group video communication services have
become extremely popular and valued (Kodama, 2020). However, these bright spots do not
suggest that the sector has been insulated. Thus, in some cases, it has created opportunities
for growth, but it has had a negative impact in others. Therefore, although coronavirus
disease 2019 (COVID-19) has impaired profits in other retail-oriented sectors, its impact on IT
services firms remains unknown. This uncertainty was even more pronounced in the early
days of the pandemic.
The nature of the pandemic is unseen; hence, typical business continuity plans may not be
able to handle the COVID-19 outbreak (Papagiannidis et al., 2020). Typical contingency plans
generally cover natural disasters, power outages and cyberattacks, among others. However,
the pandemic is characterised by extended lockdowns, quarantines, closures of facilities and
strict travel restrictions, which these plans generally do not consider (PWC, 2020). Thus, it is
important to understand the communication strategies of these technology companies when
the pandemic began.
Investors require information about firms to make informed investment decisions. The
market assumes that the manager has superior information to that of investors in terms of the
firm’s economic reality (Healy and Palepu, 2001). The prior literature has highlighted that
qualitative financial reporting increases the transparency of the financial situations of
companies and enables market participants to evaluate the risks better (Bushman and Smith,
2001;Diamond and Verrecchia, 1991). Organisations in their disclosures must reassure
shareholders and communicate about the standpoint of the company. In fact, in a previous
study (Argenti, 2020), it was noted that “companies have a special responsibility to
communicate the impact of the virus on their operations”.
Poor corporate communication about the effects of the COVID-19 pandemic may prove
costly for firms and create a divergence in the opinion about the prospects of the company.
The resulting improvement in information asymmetry increases the risk perception of the
firm, which, in turn, increases the costs of business transactions and reduces profitability. An
increase in the costs of long-term business transactions, such as service agreements and long-
term contracts, may affect the operational performance of these firms even after the end of the
crisis. In addition, the availability of outside capital may decline, and the cost of capital may
increase, creating a lack of resources to help firms sail through difficult times and a lower
capacity to capitalise on growth opportunities.
In this study, we examine whether IT firms have communicated about the coronavirus in
their Securities and Exchange Commission (SEC) disclosures and understand whether there
was any benefit in disclosing pandemic-related information. Despite the importance of timely
communication, there is less clarity about communication on the pandemic from IT services
firms in the early days of the pandemic. Many were deterred from communicating about the
virus for three main reasons. First, the uncertain nature of the pandemic might have restricted
them from assessing the impact on their business and operations (Kravet and Muslu, 2013).
Second, firms might have believed that negative news, such as the COVID-19 virus, may hurt
their stock prices. Finally, and most importantly, firms may have refrained from disclosing
information about the pandemic because they might not have perceived it to be a major
disruptor of their businesses in the initial days of the pandemic. The decision to disclose the
coronavirus pandemic in a 10-K form is voluntary, and it depends on management discretion;
however, filing a 10-K form with the SEC is mandatory. Thus, ours is a unique research
context to understand whether managers of IT services firms are revealing information about
the impact of the crisis.
Because IT services firms have not been as badly hit as other industries, such as tourism
and hospitality, oil and gas drilling, auto parts and equipment [1], they are expected to
underreport information related to coronavirus. Furthermore, it is believed that COVID-19
brings opportunities to some of them; hence, communicating about the pandemic
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