An Empirical Study of the Casual Relationship Between IT Investment and Firm Performance

Qing Hu, Robert Plant

Research output: Contribution to journalArticle

55 Scopus citations

Abstract

The promise of increased competitive advantage has been the driving force behind the large-scale investment in information technology (IT) over the last three decades. There is a continuing debate among executives and academics as to the measurable benefits of this investment. The return on investment (ROI) and other performance measures reported in the academic literature indicate conflicting empirical findings. Many previous studies have based their conclusions on the statistical correlation between IT capital investment and firm performance data of the same time period. In this study we argue that the causal relationship between IT investment and firm performance could not be reliably established through concurrent IT and performance data. We further submit that it would be more convincing to infer causality if the IT investments in the preceding years are significantly correlated with the performance of a firm in the subsequent year. Using the Granger causality models and three samples of firm level financial data, we found no statistical evidence that IT investments have caused the improvement of financial performance of the firms in the samples. On the contrary, the causal models suggest that improved financial performance over consecutive years may have contributed to the increase of IT investment in the subsequent year. Implications of these findings, as well as directions for future studies, are discussed.

Original languageEnglish (US)
Pages (from-to)15-26
Number of pages12
JournalInformation Resources Management Journal
Volume14
Issue number3
DOIs
StatePublished - 2001

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ASJC Scopus subject areas

  • Business and International Management
  • Strategy and Management
  • Library and Information Sciences

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