The effects of IT: from performance to value
| Date | 28 January 2014 |
| DOI | https://doi.org/10.1108/IMDS-01-2013-0005 |
| Published date | 28 January 2014 |
| Pages | 70-85 |
| Author | Chorng-Shyong Ong,Po-Yen Chen |
| Subject Matter | Information & knowledge management,Information systems,Data management systems |
The effects of IT: from
performance to value
Chorng-Shyong Ong and Po-Yen Chen
Information Management, National Taiwan University, Taipei, Taiwan
Abstract
Purpose – The purpose of this paper is to differentiate and define the concepts of firm performance
and firm value. Then, the implications of information technology (IT)-enabled firm performance and
firm value will be clarified. Finally, the effects of IT capabilities on firm performance and firm value
will be compared.
Design/methodology/approach –InformationWeek’s IT leader rankings (from 1998 to 2011) are
used for analysis in a longitudinal study. Three different test methods (i.e. significant years, significant
levels, and adjusted-previous performance) are used.
Findings – It is confirmed that no matter which tests are examined, the contributions of IT
capabilities to firm value are all greater than those to firm performance. This also shows that IT
contributes to long-term influences more than it does to short-term influences.
Research limitations/implications – This study confirms that firm performance
(accounting-based measures) and firm value (financial market-based measures) are two different
variables and IT capabilities affect these two parts differently.
Practical implications – Firms should use a long-term viewpoint to deploy their IT strategies. This
will create a long-term growth of firm value leading to greater competitiveness, and, ultimately,
sustained competitive advantage.
Originality/value – The differences between firm performance and firm value in measurements,
characteristics, and implications are specified. The empirical study confirms that IT capabilitiescontrib ute
more to firm value than to firm performance, although IT capabilities influence both at the same time.
Keywords Firm performance,Firm value, IT capability
Paper type Research paper
1. Introduction
In studies of IT-enabled organization performance, scholars usually use
accounting-based measures or financial market-based measures to measure the
impact of IT on firms (Bharadwaj et al., 1999). That is, previous studies have used both of
these measurement methods to measure organization performance. However, these two
methods should be used to measure different concepts and their meanings have not been
defined well in previous studies. Therefore, this study further differentiates and defines
the concepts of these two measurement methods. Accounting-based measures, including
backward-looking measures (Tanriverdi, 2006) and short-term influences (Saeed et al.,
2005), are referred to as “firm performance” in this study. Market-based measures,
including forward-looking measures (Tanriverdi, 2006) and long-term influences
(Saeed et al., 2005), are referred to as “firm value” in this study. It can be seen that obvious
differences exist between these two types of measures. These differences are important
for both research and practice and should be considered at the same time.
The current issue and full text archive of this journal is available at
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This research is financially supported by the National Science Council of the Republic of China
(NSC-101-2410-H-002-004; NSC102-2410-H-002-152).
Received 4 January 2013
Revised 23 February 2013
2 July 2013
Accepted 12 July 2013
Industrial Management & Data
Systems
Vol. 114 No. 1, 2014
pp. 70-85
qEmerald Group Publishing Limited
0263-5577
DOI 10.1108/IMDS-01-2013-0005
IMDS
114,1
70
Although some studies have already presented IT to the relation between firm
performance and firm value and adopt these two types of indicators to measure the
contributions of IT at the same time (Hitt et al., 2002; Ravichandran and Lertwongsatien,
2005; Tanriverdi, 2006), they cannot differentiate these two concepts rigorously and
define them clearly. For example, these two types of measurements are considered as
representing the same variable (i.e. generalized performance). They are used to
strengthen and confirm the effectiveness of IT-enabled firm outcomes. In addition, as
shown in the empirical findings of Hendricks et al. (2007) and Kohli et al. (2012), the
results of the two different methods are not the same. This also shows that the two types
of measurements should not only represent two different methods, but also represent
two totally different variables and mean different things.
Therefore, the implications of IT-enabled firm performance and firm value will also
be clarified. And this study believes that IT capabilities simultaneously have effects on
two constructs of firms: firm performance (i.e. the short-term influence) an d firm value
(i.e. the long-term influence). Overall, the importance of this study is to further explore
and compare the impact of IT capabilities on firm performance and firm value.
InformationWeek’s IT leader rankings are used for analysis in a longitudinal study.
Different test methods are used to examine and compare the impact of IT capabilities
on firm performance and firm value. Finally, it is confirmed that no matter which tests
are examined, the contributions of IT capabilities to firm value are all greater than
those to firm performance. This also shows that IT contributes to long-term influences
more than it does to short-term influences. Therefore, the firms’ considerations about
IT adoptions should be re-thought and adjusted.
2. Literature review and research hypotheses
2.1 The differences between firm performance and firm value
Firm performance and firm value are two constructs that have often been adopted to
examine IT value in previous studies. However, they have also commonly been confused. In
order to clarify the difference between the two constructs, Tam (1998) proposed the
hypothesis that IT investment is relevant to firms’ business performance ratios and stock
market returns in the early years. He suggested that the former represents the ex post
evaluation of firm performance and the latter represents the market valuation of return.
Later studies have specifically pointed out that scholars usually use accounting-based
measures and financial market-based measures to measure the impact of IT on firms’
outcomes (Bharadwaj et al., 1999; Dehning and Richardson, 2002; Ravichandran et al.,
2009). We further generalize these two types of measures. The characteristics of
accounting-based measures can be summarized as historical measures (Bharadwaj et al.,
1999), backward-looking measures (Tanriverdi, 2006), measures of firm profitability
(Ravichandran et al., 2009), retrospective measures (Kohli et al., 2012), etc. These measures
are referred to as “firm performance” in this study. On the other hand, the characteristics of
financial market-based measures can be summarized as future measures (Bharadwaj et al.,
1999), forward-looking measures (Tanriverdi, 2006), measures of firm valuation
(Ravichandran et al., 2009), prospective measures (Kohli et al., 2012), etc. These measures
are referred to as “firm value” in this study. In addition, a comparison table (Table I)
highlights and summarizes the important differences between firm performance and
firm value.
The effects of IT
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