A framework for assessing the relationship between information technology investments and firm performance

There have been several attempts in the past to assess the impact of inform ation technology on firm performance that have yielded conflicting results. Researchers have been unable to conclude that IT spending by an organizati on results in increases in key performance indicators. Two major recent stu dies have attempted to address the issue by putting greater emphasis on the theoretical underpinnings of the solution to the problem, although they ch ose different theoretical frameworks. The present study extends that work t o yield a framework that shows the relationship between firm performance an d both IT and corporate investments. The data used to validate the framewor k exceeds that used in previous analyses in both quality and quantity, ther eby permitting appropriate statistical analyses. A large database consistin g of over 2,000 observations of 624 firms was constructed, using data provi ded by the International Data Corporation, Standard & Poor's Compustat, and Moody's. This allowed us to pose the following research questions: (a) Can the relationship between sets of investment measures and firm performance be demonstrated (as opposed to individual measures)? (b) How are IT investm ents related to a firm's market value, market share, sales, and assets? and (c) Is there a difference in the effect of computer capital and noncompute r capital? Seven measures of firm performance were initially incorporated as outputs i n the framework, related to sales, assets, and market value. Similarly, sev en input measures of IT and corporate investments were initially included. Two output measures and one input were eventually eliminated to formulate a refined framework with strong explanatory power. After careful editing, ca nonical analyses were performed, resulting in several important findings. B oth IT and corporate investments have a strong positive relationship with s ales, assets, and equity, but not with net income. Spending on IS staff and staff training is positively correlated with firm performance, even more s o than computer capital.