Information technology effects on firm performance as measured by Tobin's q

Despite increasing anecdotal evidence that information technology (IT) asse ts contribute to firm performance and future growth potential of firms, the empirical results relating IT investments to firm performance measures hav e been equivocal. However, the bulk of the studies have relied exclusively on accounting-based measures of firm performance, which largely tend to ign ore IT's contribution to performance dimensions such as strategic flexibili ty and intangible value. Ln this paper, we use Tobin's q, a financial marke t-based measure of firm performance and examine the association between IT investments and firm q values, after controlling for a variety of industry factors and firm-specific variables. The results based on data from 1988-19 93 indicate that, in all of the five years, the inclusion of the IT expendi ture variable in the model increased the variance explained in q significan tly. The results also showed that, for all five years, IT investments had a significantly positive association with Tobin's q value. Our results are c onsistent with the notion that IT contributes to a firm's future performanc e potential, which a forward-looking measure such as the q is better able t o capture.