Why digital strategies matter in bond markets

December 21, 2017

COLLEGE PARK, Md. - Information technology (IT) investments are often valued favorably by the stock market because of their strategic nature and important role in influencing revenue and profit growth of firms. New research by professors Sunil Mithas and Michael Kimbrough at the University of Maryland's Robert H. Smith School of Business, with Keongtae Kim, a Smith School PhD graduate and now assistant professor at the Chinese University of Hong Kong, shows that IT investments also matter to bond markets. However, bond markets value IT investments differently than stock markets according to the strategic roles of IT in industries and the types of risks they create.

Bond markets are the single-largest source of financing for U.S. firms. In 2016, firms in the United States raised $1.49 trillion through corporate bonds, surpassing by a wide margin funds financed through stock markets. Technology firms such as Tesla, Amazon and Microsoft frequently use bond markets to access capital to buy back shares or for their strategic growth investments.

Mithas and his coauthors found that credit rating agencies and bond investors favor IT investments in industries where IT is used mostly to automate business process and to facilitate richer information flows, as opposed to industries where IT transforms products, services and business models. One reason for this may be that although IT investments create higher future cash flows, these cash flows are especially volatile in transform industries -- creating a downside risk in such industries for bondholders.

A key insight from the study is that IT investments are both associated with a firm's operational performance and related to financing costs such as costs of debt. Thus, "senior managers may need to look beyond measuring the improvement in organizational performance driven by IT assets and also consider the potential financial benefits of increased IT capabilities, such as the willingness of corporate bond investors to accept lower financing costs," Mithas and his coauthors say.

Because bondholders view IT investments in transform industries as riskier than in other industries, firms should use bond markets strategically differently depending on which industries they operate in. Firms in transform industries may be able to lower their borrowing costs by sharing more information about IT investments with bond investors to alleviate their concerns about the risks of such investments. Likewise, firms in other industries may be able to lower their borrowing costs by making disclosures to bondholders that highlight the low risks and stable cash flows associated with their IT investments.

The findings are important as firms invest more in various emerging digital technologies such as artificial intelligence, blockchain, cloud computing and Internet of Things. Investments in such technologies will provide huge growth potential but at the same time may pose serious risks in implementing them. Thus, understanding how such investments are viewed by shareholders and bondholders will be crucial for firms to get their digital stories right.
-end-
"Information Technology Investments and Firm Risk Across Industries: Evidence from the Bond Market," by Keongtae Kim, Sunil Mithas, and Michael Kimbrough, appears in the December 2017 issue of MIS Quarterly.

University of Maryland

Related Information Technology Articles from Brightsurf:

December issue SLAS Technology features 'advances in technology to address COVID-19'
The December issue of SLAS Technology is a special collection featuring the cover article, ''Advances in Technology to Address COVID-19'' by editors Edward Kai-Hua Chow, Ph.D., (National University of Singapore), Pak Kin Wong, Ph.D., (The Pennsylvania State University, PA, USA) and Xianting Ding, Ph.D., (Shanghai Jiao Tong University, Shanghai, China).

New technology lets quantum bits hold information for 10,000 times longer than previous record
Quantum bits, or qubits, can hold quantum information much longer now thanks to efforts by an international research team.

Information technology played key role in growth of ancient civilizations
A new paper in Nature Communications shows the ability to store and process information was as critical to the growth of early human societies as it is today.

Information technology can save police lives, according to a new study
Police officers face well-documented risks, with more than 50,000 a year assaulted on the job in the United States.

Shaping nanoparticles for improved quantum information technology
Argonne researchers find that semiconductor nanoparticles in the shape of rings have attractive properties for quantum networking and computation.

Quantum interference in service of information technology
Scientists from the Faculty of Physics, University of Warsaw, in collaboration with the University of Oxford and the NIST agency, have shown that quantum interference enables processing of large sets of data faster and more accurately than with standard methods.

Leveraging information technology to address health disparities
Within the supplement are 12 original research papers and five editorials and commentaries.

Using information technology to promote health equity -- update in Medical Care
An innovative health information technology (IT) program helps primary care providers to detect and manage depression and posttraumatic stress disorder (PTSD) in traumatized refugees, reports a study in a special June supplement to Medical Care.

Information technology can support antimicrobial stewardship programs
The incorporation of information technology (IT) into an antimicrobial stewardship program can help improve efficiency of the interventions and facilitate tracking and reporting of key metrics.

Nanoscale pillars as a building block for future information technology
Researchers from Linköping University and the Royal Institute of Technology in Sweden propose a new device concept that can efficiently transfer the information carried by electron spin to light at room temperature -- a stepping stone towards future information technology.

Read More: Information Technology News and Information Technology Current Events
Brightsurf.com is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.