Seeking value through deviation? Economic impacts of it overinvestment and underinvestment

Abstract

This study addresses the economic impacts of information technology (IT) overinvestment and underinvestment decisions. Based on the view of Red Queen competition in conjunction with institutional theory, we hypothesize that overinvestment and underinvestment in IT have nonlinear performance impacts. Drawing on the idea of management control mechanisms, we further hypothesize that the performance impacts are conditional on ownership concentration. Using a sample of S&P 500 firms, we find that, on average, there is a positive relationship between a firm's overinvestment in IT and Tobin's q, although that relationship attenuates at higher levels of overinvestment. However, there is, on average, no relationship between a firm's underinvestment in IT and its Tobin's q. Importantly, the payoff for underinvestment becomes positive for companies with founding-family ownership. Implications for research and practice are discussed.