Does Information Technology Investment Influence a Firm's Market Value? A Case of Non-Publicly Traded Healthcare Firms

Abstract

Managers make informed information technology investment decisions when they are able to quantify how IT contributes to firm performance. While financial accounting measures inform IT's influence on retrospective firm performance, senior managers expect evidence of how IT influences prospective measures such as the firm's market value. We examine the efficacy of IT's influence on firm value combined with measures of financial performance for non-publicly traded (NPT) hospitals that lack conventional market-based measures. We gathered actual sale transactions for NPT hospitals in the United States to derive the q ratio, a measure of market value. Our findings indicate that the influence of IT investment on the firm is more pronounced and statistically significant on firm value than exclusively on the accounting performance measures. Specifically, we find that the impact of IT investment is not significant on return on assets (ROA) and operating income for the same set of hospitals. This research note contributes to research and practice by demonstrating that the overall impact of IT is better understood when accounting measures are complemented with the firm's market value. Such market valuation is also critical in merger and acquisition decisions, an activity that is likely to accelerate in the healthcare industry. Our findings provide hospitals, as well as other NPT firms, with insights into the impact of IT investment and a pragmatic approach to demonstrating IT's contribution to firm value.

The impact of Environmental Protection Agency penalties on financial performance

“…However, insurance firms usually keep data related to environmental insurance premiums, environmental insurance coverage, and environmental claims as highly proprietary (Schoemaker & Schoemaker, 1995), and therefore, it is difficult to identify the direct impacts of fines in these cases because firms are not required by law to disclose in their SEC reports information about their environmental allowances or environmental insurance coverage that they may have, so there is no way to know if a firm has an allowance or environmental insurance coverage, and even if a firm has it, the amount of the coverage is not public. Furthermore, earnings contribute to firm value, and although investors and stockholders have a preference to invest in efficient firms, ultimately, they are interested in the ability of the firm to generate earnings (Kohli, Devaraj, & Ow, 2012). For instance, investors such as Warren Buffett consider a good investing practice the attainment of a high earnings rate on equity capital employed and not the achievement of consistent gains in earnings per share (Bowen, Rajgopal, & Venkatachalam, 2014).…”

It Depends on the Size: How Firm Strategic Emphasis on Digital Transformation Predicts Market Capitalization

“…First, by exploring the effect of strategic emphasis on digital transformation on firm evaluation on a stock market, we respond to a call of existing studies to investigate the questions related to success, risks and failures of digital transformation for firms [3]. Hereby, we show that an increased strategic emphasis on digital transformation leads to a higher evaluation of larger firms and to a lower evaluation of smaller firms on a stock market [13,14]. Hence, we demonstrate, that is might be easier for larger firms to be successful in their digital transformation endeavors [2], because they are rewarded by the stock market in a timely way.…”

“…As opposed to this, a smaller firm's disclosure of a higher strategic emphasis on digital transformation can signal an endeavor with a higher risk of failure to investors, resulting in lower performance expectations for this firm [26][27][28]. Thus, potential investors' interest in a firm stock will decrease, leading to a lower market capitalization [13,14,32]. Accordingly, we hypothesize:…”

“…Thus, if a larger firm discloses a higher strategic emphasis on digital transformation, investors will be likely to assess this firm as having a higher probability of successfully managing its digital transformation and realizing the corresponding performance benefits [6,7]. Hence, investors, who consider buying company's stock, will be willing to pay a higher price for it, resulting in an increased stock price and market capitalization [13,14,32]. As opposed to this, a smaller firm's disclosure of a higher strategic emphasis on digital transformation can signal an endeavor with a higher risk of failure to investors, resulting in lower performance expectations for this firm [26][27][28].…”

“…Hence, empirical evidence on the link between firms' signals of digital transformation and stock market reactions to them is missing [3]. This gap is of substantial importance, as the stock market is likely to react to such signals [13,14], and firms, facing many challenges on their digital transformation paths, need to anticipate them [2,3,5].…”