Fortune 1000 IT investments are riskier than capital investments, says management insights

Dec 28, 2007

A study of Fortune 1000 companies shows that investments in information technology carry higher risk than other capital investments, according to the Management Insights feature in the current issue of Management Science, the flagship journal of the Institute for Operations Research and the Management Sciences.

Management Insights, a regular feature of the journal, is a digest of important research in business, management, operations research, and management science. It appears in every issue of the monthly journal.

“Investigating the Risk–Return Relationship of Information Technology Investment: Firm-Level Empirical Analysis” is by Sanjeev Dewan, Charles Shi, and Vijay Gurbaxani of the University of California at Irvine.

Investment decisions are guided by both expected returns and incremental risks, the authors note. Yet, outside of anecdotal evidence, very little is known about the riskiness of information technology (IT) investments, which make up an increasingly dominant component of firms’ capital asset portfolios. This paper attempts to fill this gap by analyzing a large-scale data set of IT capital spending by Fortune 1000 companies.

The authors find that IT investments are substantially riskier than ordinary capital investments, and that IT risk is associated with a substantial risk premium. This risk premium is driven in part by the lost option value of making irreversible capital investment decisions.

A key implication of the findings is that managers should apply a substantially higher discount rate when evaluating IT investments relative to other types of less risky capital investments. Furthermore, the results suggest that the timing of IT capital investment is a critical factor in managing both the risks and returns of IT investments.

Source: Institute for Operations Research and the Management Sciences

Explore further: Apple, Samsung lose ground in cooling tablet market

add to favorites email to friend print save as pdf

Related Stories

Government publishes UK Antarctic science strategy

Jul 17, 2014

A framework document, 'UK Science in Antarctica 2014-2020,' is published today (Wednesday 16 July). Prepared by the UK National Committee for Antarctic Research on behalf of the UK Antarctic community it ...

Solar project to bring energy to three D.C. institutions

Jun 24, 2014

The George Washington University (GW), American University (AU) and the George Washington University Hospital (GWUH) announced Tuesday that they will create a renewable energy project that brings solar power from North Carolina ...

Cash crops enhance food security

Jun 13, 2014

Crops sold on markets ('cash crops') are an integral part of strategies to improve food security at farm household level in developing countries. By selling their surplus production, agricultural households ...

China's startups hope for boom after Alibaba IPO

Jun 11, 2014

Nils Pihl has spent 18 months building what he calls cutting-edge software to crunch "really big data sets." But instead of going to Silicon Valley, the 27-year-old Swede and his four colleagues have been ...

New species discoveries in the Greater Mekong

Jun 05, 2014

A giant flying squirrel, a skydiving gecko, a fish that mates head-to-head, and an eyeless cave-dwelling spider are among the 367 new species revealed by scientists in the Greater Mekong region in 2012-2013, ...

Recommended for you

Nokia profits rise after sale of handset division

5 hours ago

(AP)—Telecommunications and wireless equipment maker Nokia Corp. saw its shares surge on Thursday after it reported higher profits and an improved earnings outlook in the wake of its sale to Microsoft of its troubled handset ...

Swiss drug maker Roche posts 7 percent profit drop

8 hours ago

(AP)—Swiss drugmaker Roche Holding AG on Thursday posted a net profit drop of 7 percent compared with a year ago, weighed down by a strong Swiss franc and charges from one of its diagnostic units.

Cheaper wireless plans cut into AT&T 2Q profit

19 hours ago

(AP)—AT&T Inc. on Wednesday posted lower net income for the latest quarter due to cheaper cellphone plans it introduced as a response to aggressive pricing from smaller competitor T-Mobile US.

Facebook 2Q earnings, revenue soar (Update)

19 hours ago

(AP)—Facebook is on a roll. The world's largest online social network posted sharply higher earnings on Wednesday as revenue from mobile advertising continued to grow, and more people used it, more often.

User comments : 0