ERP system implementation announcements: does the market cheer or jeer the adopters and vendors?

Abstract

Purpose – The purpose of the study is to examine the implementation of Enterprise Resource Planning (ERP) on the announcement of firms’ stock market returns. The authors investigate the stock market reaction on ERP adopters and ERP vendor firms in the USA during 1990-2010. The study examines firm- and non-firm-specific factors including the role of the financial analyst in explaining the determinants of the cumulative abnormal returns surrounding ERP announcements of adopting firms. Design/methodology/approach – Data on ERP system implementation announcements of 112 US firms for the period 1990-2010 were collected from LexisNexis Academics. The authors estimate abnormal returns using an event study methodology for each of the ERP announcements based on the Fama–French three-factor and Fama–French-momentum four-factor models for ERP adopters and for vendors. Subsequently, the authors explain the determinants of abnormal returns in terms of firm and non-firm behavioral variables using cross-section regression methodology. Findings – The empirical results establish that cumulative abnormal returns of US firms on ERP system implementation announcements are positive, signifying that investors view this decision positively and that ERP implementation contributes to enhanced business value in the future. On the contrary, the impact of ERP announcements on vendors is muted. We find that the extent of financial analyst coverage negatively impacts abnormal returns, while the extent of stock market liquidity has a significant positive impact on abnormal returns. Research limitations/implications – This study is based on a sample of ERP implementing firms which are predominantly large firms and on technology provided by one vendor that is predominantly monopolistic. Practical implications – Firms’ attitudes toward implementing an ERP system for future efficiency gains and the implications on the stock market (and indirectly, on the cost of equity of adopters) provide valuable insights for firms and stock markets. Originality/value – This study brings clarity to the debate on stock market impacts of ERP implementation announcements – stock markets cheer such announcements. The study also contributes to the literature by examining firm-specific factors (such as performance, size and leverage) and non-firm-specific factors (such as market risk and analyst coverage) in explaining the determinants of abnormal returns of firms announcing ERP investment.

Risk management and firm value: recent theory and evidence

“…They find that the effectiveness of corporate governance is enhanced and performance 75 Risk management and firm value improved in the post-financial crisis period, consistent with the theoretical predictions of Bolton et al (2011) and Gamba and Triantis (2014), as well as the empirical results of Baxter et al (2013); Allayannis et al (2012); Fauver and Naranjo (2010) and Lel (2012). Ajit et al (2014) use an event study methodology to examine whether firms experience abnormal stock returns following the announcement of ERM implementation. They find abnormal risk-adjusted returns of 1.12 per cent during the three-day window surrounding such announcements.…”

Applying structural equation model to study the critical risks in ERP implementation in Indian retail

“…Also it is imperative that the vendor support is received during the implementation failing which the product interpretation may not be sufficient to fill the gaps identified (Remus, 2007;Somers and Nelson, 2001). Vendor stability and product support is a great positive for ERP implementation; in fact it may also lead to rising stock prices for the client organization, on the flip side the absence of the same is a risk (Ajit et al, 2014;Brennen and Hughes, 1991). An important aspect of project performance is stress testing; in case the stress testing of the product is not done it may be cause of a stalled ERP project (Remus, 2007;Somers and Nelson, 2001).…”

An integrated framework for ERP system implementation

“…Furthermore, recent studies have pointed out that knowledge sharing plays a mediating role linking information systems maturity and firm performance (Rao et al, 2015). It can enhance the business value by increasing investor confidence (Ajit et al, 2014), return-on-assets and return-on-investment, increasing technological competence (Galy and Sauceda, 2014). However, the implementation and adoption of ERP systems across many industries and organisations have resulted in both failures and successes.…”