Assessing the impact of knowledge management strategies announcements on the market value of firms

Although there is much literature on the relationship between KM strategies and organizational performance, the benefit of KM strategies is not well understood. We addressed this issue by exploring how KM strategies influence a firm's market value using event study methodology. We evaluated the cumulative abnormal returns for KM strategies announced by U. S. firms from 1998 to 2003. Our findings supported the hypothesis that firms’ announcements about their KM strategies provoked positive reactions in the market. More specifically, strategies that focus on either (i) knowledge reusability through IT or (ii) knowledge sharing through informal discussions among employees contributed to higher performance than strategies that emphasized both. This outcome empirically supported our argument that the emphasis on either tacit or explicit knowledge results in a better market value of the firm. Furthermore, the market's reaction to the announcement is dependent on the firm's industry classification. The findings of this study offer insights that may help managers maximize the market impact of their KM strategies.     

Are open standards good business?

The debate about the relative merits of open vs. proprietary standards is long and ongoing. Proponents of open standards argue that they are good for society as they encourage adoption, have lower risk, and increase interoperability between technologies. On the other hand, proponents of proprietary standards maintain that monopolistic returns are justified given huge upfront and ongoing investments. While there are merits to both sides of this debate, we take a more objective approach in evaluating whether it makes sense to develop or invest in open standards. We collect investors’ reactions to Extensible Markup Language (XML) schema announcements and compare these with estimated returns for the same stock to determine whether the returns were above or below normal. We find that investors prefer proprietary XML schemas to open XML schemas by as much as 28,000%. We also find that this preference has been stable over time except in 2001 – the period of the dot com bubble burst - when investors temporarily preferred open standards. We attribute these results to two things. First, expected returns from monopoly control of proprietary standards, even though uncertain, are often worth more than those expected from open standards. Second, it seems that the markets are still unsure of the monetary benefits of open standards to the firm. Thus, companies that embrace open standards will have to better communicate to the investors the value proposition of open standards if they want to generate positive reactions on their open standardization efforts.     

Interorganizational information sharing in the airline industry: An analysis of stock market responses to code-sharing agreements

This paper addresses the issue of inter-organizational information sharing alliances and their impacts on firm values from the perspective of inter-organizational coordination between partners in the airline industry setting. We investigate the shareholder wealth effects of inter-organizational information-sharing alliance arrangements, using 131 code-sharing agreements in the airline industry during 1984–1997. Employing event study methodology we found that the information sharing alliances between similar partners did create positive value in terms of stock returns at the time of alliance announcements to major US airlines. However, alliances between dissimilar partners resulted in significant losses of shareholder value to the major airlines. These results strongly support our main hypotheses that information-sharing alliances are successful and the benefits of such alliances are realized only when the coordination difficulties can be effectively dealt with.     

Rational fads in investor reactions to electronic commerce announcements: An explanation of the Internet bubble

This work proposes that information cascade theory can help to explain the formation of the Internet bubble. We propose that the bubble existed because a lack of good information about the potential value of electronic commerce led investors to rely on other investors’ private valuations of electronic commerce. We use the event study methodology to estimate returns to company announcements of electronic commerce initiatives in 1999 and 2000. We find that after controlling for network externalities and time trends, investors’ valuations of the returns to electronic commerce initiatives were significantly influenced by the market return from prior periods. Moreover, the relative weight placed on prior periods’ returns decreased as the variance of the prior periods’ returns increased. Both of the results are consistent with the behavior predicted by information cascade theory.     

Estimating the impact of cloud computing on firm performance: An empirical investigation of listed firms

This study empirically investigates the economic impact of cloud service adoption on firm performance. We exploit the difference-in-differences models coupled with propensity score-based matching to estimate the performance effect of cloud computing on worldwide listed firms that adopted cloud service during 2010–2016. The results indicate that cloud computing has a significant and positive impact on the profitability and market value of listed firms with varying degrees in both short and long time periods. In addition, the magnitude of the performance effect varies with firm size and industry type. This research contributes to empirical examination on the economic values of IT investments.     

Estimating the market impact of security breach announcements on firm values

Security breaches can have a significant economic impact on a firm. With public disclosure laws passed, security breaches involving disclosure of private client information can both damage the firms’ reputation and lead to fines by US government agencies. We examined the impact of security breaches of US firms, as measured by their impact on the firm's market value. Data on security breaches were collected over the period 2004–2008. Reports and news articles corresponding to these breaches were obtained from public sources. Using event-study methodology, we estimate the impact of security breaches on the market value of publicly traded firms. Daily stock returns for firms impacted were obtained. Our results indicated that, on average, the announcement of a corporate security breach had a negative impact of about 1% of the market value of the firm during the days surrounding the event.     

Performance implications of internet channels in financial services: A comprehensive perspective

Advances in information technology (IT) have forced financial services firms to explore new organizational forms and deliver service innovation. Given the obvious differences in the business model in which the financial services sector provides online services, it is natural to ask whether the emergence of Internet channels leads to superior achievement. Using a sample of twenty-four Taiwanese publicly traded financial services firms from 1997 to 2003, this empirical study attempts to assess the Internet channel??s effect on firm performance by means of applying event study methodology and data envelopment analysis. Results show that the magnitudes of average abnormal returns are uniformly positive and increase the operating efficiency of firms following announcements via Internet channels. This work therefore concludes that Internet channels have positive influences on firm performance.     

Information security breaches and IT security investments: Impacts on competitors

In current business climate, a firm’s information systems security is no longer independent from the industry’s broader security environment. A question arises, then, whether stock market values reflect the interdependence of security breaches and investments. In this paper, we used the event study methodology to investigate how a firm’s security breaches and IT security investments influence its competitors. We collected and reviewed 118 information security breaches and 98 IT security investment announcements from 2010 to 2017. We found substantial evidence supporting our hypothesis that information security breaches do, indeed, have a competition effect: when one firm is breached, its competitors have opportunities to absorb market power. For the IT security investment announcements, however, we observed the positive externalities, or contagion effect, in play: market investors feel that the security investments made by one firm increase the security level of the entire network, and hence, competitors also get benefits. Additionally, we found that the competition effect was higher when the breaches occurred after the preceding security investments than when there were no preceding investments before the breaches.     

Effects of firm and IT characteristics on the value of e-commerce initiatives: An inductive theoretical framework

We explore the theoretical foundations on how firm and IT characteristics explain the market value variations in e-commerce initiatives by examining the announcements of 946 e-commerce initiatives in the public media. Our approach combines the Event study methodology and Decision tree induction to examine the main and interaction effects of IT and firm characteristics on Cumulative Abnormal Returns (CAR). In particular, we generate complex interaction models that can guide e-commerce investment decisions so managers can know, for example, which combination of IT and firm characteristics are more likely to be viewed positively by investors. The selected study variables as well as explanation of the proposed framework are informed by innovation, resource-based view, transaction cost economics and complementarity theories. We have inductively developed a set of propositions that can be deductively tested to assess the validity of our proposed theoretical framework. Hence our study provides an initial roadmap for theory development on e-commerce and CAR.     

A Multilevel Model of Information Technology Value

Traditionally, firms that dominate their industries perform better when their markets are growing. This is because their large size makes it easier for them to achieve economies of scale. We present empirical evidence that the impact of information technology (IT) on the firm performance is the opposite: firms with less market power enjoy greater benefits in a growing market. This study draws on the IT value literature to examine how industry and firm attributes jointly affect firms’ returns on their IT investments. To that end, we develop cross-level hypotheses to examine how the economic value of IT to firms is influenced by industry growth and firm size. By using a hierarchical linear model to test the industry–firm interactions, we are able to control for violations of statistical assumptions that are likely to bias cross-level estimates obtained using conventional statistical methods. The implications of these findings for research and practice are examined.     

Market reactions to E-business outsourcing announcements: An event study

Stock markets have reacted favorably to firms who announced their implementation of E-business projects for commercial exploitation. Those that outsourced E-business projects in order to achieve swift execution also achieved abnormal positive returns. Contrary to expectations, outsourcing E-business projects with high task complexity also led to positive results. We analyzed the process and found that these three factors explained more than 20% of the variance in abnormal returns. The results were obtained from an event study of 96 E-business-related announcements, including those made by firms in the S&P500 index during 1999–2002. This paper contains information that should therefore help firms identify E-business projects for outsourcing.     

Information Systems Offshore Outsourcing: An Exploratory Study of Motivations and Risks in Large Spanish Firms

Prior research has documented that IT investment increases market returns. Economic theories predict such returns to be recognized in accounting profitability; this relationship remains ambiguous in prior literature. We reexamine the relationship between IT investment and firm profitability. Our approach is unique in that we examine complementarities between distinct IT components. We document that a firm’s investments in IT components exhibit different impacts on its profitability conditional on the level of investments in complementary components.     

A double-threshold GARCH model of stock market and currency shocks on stock returns

International integration of financial markets provides a channel for currency movements to affect stock prices. This paper applies a four-regime double-threshold GARCH (DTGARCH) model of stock market returns to investigate empirically the effects of daily currency movements on five stock market returns, namely in Taiwan, Singapore, South Korea, Japan and the USA. The asymmetric reactions of the mean and volatility stock returns in five markets to stock market and foreign exchange news are investigated using linear and nonlinear models. We discuss a four-regime DTGARCH model, which allows for asymmetry in both the conditional mean and conditional variance simultaneously by using two threshold variables to analyze stock market reactions to different types of information (that is, positive and negative news) that are generated from stock and foreign exchange markets. By applying the four-regime DTGARCH model, this paper finds that the interactions between the information of stock and foreign exchange markets lead to asymmetric reactions of stock returns and their associated variability. The empirical results show that international fund managers who invest in newly emerging stock markets need to evaluate the value and stability of domestic currencies as part of their stock market investment decisions.     

Stocks and flows underlying organizations’ knowledge management capability: Synergistic versus contingent complementarities over time

What are the components of a knowledge management (KM) capability and how do they impact firm performance? Based on prior research, we modeled a firm's KM capability in terms of its accumulations of stock – in the areas of human resources, technology infrastructures, and strategic templates – and regulation of flow, via institutionalization and internal and external learning processes. We then considered the extent to which these components complement one another in their impact on two types of firm performance – efficiency, based return on assets, and value creation, assessed as Tobin's q (the ratio of the capital market value of the firm to the replacement value of its assets). We posited differential types of stock-flow complementarities across these two performance outcomes over time – stable, positive effects on firm efficiency, synergistic complementarity, and initially positive, but subsequently negative effects on value creation, contingent complementarity. Data gathered from 218 Korean firms supported this premise. Implications for practice in the evolving fields of organizational capability and complementarities were explored.     

Information technology investments and firm value

Our objective in this paper is to develop a firm value model to assist IT managers and researchers in understanding the multiple effects that IT investments have on firm value. This firm value approach adds to the process-oriented approach through simultaneous evaluation of all of the factors that affect firm value. It is crucial for IT professionals to recognize the complex and diverse implications of IT investments on firm value. The implications of the firm value approach include forcing IT managers to think in terms of both industry and company-specific effects of IT investments, to consider both the magnitude and duration of competitive advantage due to IT investments, and the implications of the effect that IT investments have on risk and its relation to firm value. We demonstrate an application of the firm value framework by evaluating a major stream of research in MIS—event studies of IT investment announcements. Appendices to this paper can be found at http://www.itandfirmvalue.com.     

Does privacy breach affect firm performance? An analysis incorporating event-induced changes and event clustering

Previous studies have analyzed the impact of cybersecurity breaches on firm performance, but the impact of the privacy breach on firm performance is less explored. Needless to say, the privacy of the individual's personal information has been a rising concern for organizations over the years. Previous studies, primarily focused on cybersecurity breaches, have used a simple market model (MM) to observe the impact of these breaches on firm performance. Our study has used an advanced market model (AMM), which observes the event-induced changes in the variance of stock returns and changes in MM parameters, which are ignored by the MM. The ignorance of this may lead to a biased cumulative abnormal return (CAR) computation. We have also included the event clustering observation (events that are very close to each other) in our study and evaluated AMM with seemingly unrelated regression (SUR), i.e., AMM-SUR. We have used data of 193 privacy breaches related to the US firms listed on NYSE (USA), NASDAQ (USA) for the years 2012 (43 breaches), 2013 (37 breaches), 2014 (51 breaches), and 2018 (62 breaches). Abnormal returns for the firms are found negative due to these privacy breaches, but AMM consistently reports more negative abnormal returns than MM for all the years. The AMM-SUR, observing event clustering, consistently reports slightly lower negative abnormal returns than the AMM for all the years. We have also calculated the average financial loss due to a privacy breach for these years and for three different models, i.e., MM, AMM, and AMM-SUR.     

An empirical investigation of the effects of firm characteristics on the propensity to adopt cloud computing

Cloud computing (CC) is emerging as a new paradigm of resource acquisition and management of information and communication technologies (ICT) by firms, which can offer significant benefits, but at the same time can pose significant risks as well, so its adoption by firms has been lower than the initial expectations. Therefore, it is quite important to gain a better understanding of the factors affecting positively or negatively the adoption of CC. This paper presents an empirical investigation of the effects on a firm’s propensity to adopt CC of a set of firm characteristics referring to technological infrastructure, strategy, personnel skills, size and competition. Its conceptual foundation is the Technology, Organization and Environment theory of technological innovation adoption. Our study is based on data from 676 European manufacturing firms from the glass, ceramics and cement sectors, which have been collected through the e-Business Survey of the European Commission. The results indicate that in the above sectors ICT infrastructure sophistication has the strongest positive effect on CC adoption propensity among all examined firm characteristics. Furthermore, we have found that the existence of an ICT investment reduction strategy, the employment of specialized ICT personnel and the existence of previous experience of ICT outsourcing also have positive effects on a firm’s propensity to adopt CC. On the contrary, employees ICT skills, price and quality competition do not affect CC adoption propensity. Finally, our results also indicate that in the three examined sectors firm size has no significant influence on the propensity to adopt CC.     

The impact of perceived risk on the capital market’s reaction to outsourcing announcements

Outsourcing is a widely accepted option in strategic management, which, like every business venture, bears opportunities and risks. Supplementing the popular area of research on the merits of outsourcing, this paper examines how stockholders rate corporate sourcing decisions with regard to the risk they associate with this transaction. Using event study methodology and multivariate cross-sectional OLS-regression, we analyze a sample of 182 outsourcing transactions in the global financial services industry between 1998 and 2004 in order to investigate the risk-specific drivers of excess returns to shareholders. The analysis studies the impact of risk-specific independent variables, including transaction size, length, outsourced business functionality, and experience with outsourcing. Our findings indicate that risk-mitigating strategies have significant explanatory power, indicating that the capital market’s reaction to an outsourcing announcement might at least partly be forecast. Results show a positive correlation between market reaction and business process outsourcing by financial services companies. We also find strong evidence indicating that capital markets react positively to relatively large transactions compared to the market capitalization of the outsourcing firm. For service providers our results show that traditional IT-related sourcing projects or the insourcing of administrative processes have a significant positive correlation with market reaction.     

Does RFID improve firms’ financial performance? an empirical analysis

Radio frequency identification (RFID) is viewed as a technology that improves supply chain efficiency by enhancing inventory efficiency, optimizing logistics, and coordinating the flow of materials. Although RFID has gained great attention in many business applications, the financial gain that accrues over time from RFID adoption is not well understood. We examine the effects of RFID on firm profits while adjusting for self-selection of adoption choice. We find that firms self-select into a certain adoption mode on the basis of their organizational characteristics. Our results also show that RFID confers significant benefits for firms that have adopted RFID. Interestingly, improved inventory ratio and sales efficiency begin to play a greater role in shaping higher profitability over time for firms that have adopted RFID possibly due to time-consuming processes for them to reap the benefits from RFID. However, we find that the values of RFID that accrue to firms are not universal across firm. That is, our results suggest that RFID confers a significant value for certain firms while it does not for other firms with unobservable disadvantages. In sum, our study sheds new light on what drives firms to adopt RFID and on which firms achieve higher financial performance in a post-adoption period as a result of RFID adoption.