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

December 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 (INFORMS®). 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.
-end-
The current issue of Management Insights is available at http://mansci.journal.informs.org/cgi/reprint/53/12/iv. The full papers associated with the Insights are available to Management Science subscribers. Individual papers can be purchased at http://institutions.informs.org. Additional issues of Management Insights can be accessed at http://mansci.pubs/informs/org/.

The Insights in the current issue are: INFORMS journals are strongly cited in Journal Citation Reports, an industry source. In the JCR subject category "operations research and management science," Management Science ranked in the top 10 along with two other INFORMS journals.

The special MBA issue published by Business Week includes Management Science and two other INFORMS journals in its list of 20 top academic journals that are used to evaluate business school programs. Financial Times includes Management Science and four other INFORMS journals in its list of academic journals used to evaluate MBA programs.

About INFORMS
The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with 10,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, financial engineering, and telecommunications. The INFORMS website is www.informs.org. More information about operations research is at www.scienceofbetter.org.

Institute for Operations Research and the Management Sciences

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.