Riding the waves of technology through the decades: The relation between industry-level information technology intensity and the cost of equity capital |
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| Institution: | 1. Room 474, Admin Building, Nottingham University Business School China, University of Nottingham Ningbo China, 199 Taikang East Road, Ningbo 315100, China;2. Belk College of Business 268C Friday Building, The University of North Carolina at Charlotte, Charlotte, NC 28223, United States;3. 8000 Utopia Parkway, St. John''s University, Queens, NY 11439 United States;1. Department of Accountancy, Bentley University, 175 Forest St. Waltham, MA 02452, USA;2. Department of Accounting, University of Massachusetts Lowell, 1 University Avenue, Lowell, MA 01854, USA;3. Charlton College of Business, University of Massachusetts Dartmouth, 285 Old Westport Road North Dartmouth, MA 02747, USA;4. Graduate School of Management, Clark University, 950 Main Street, Worcester, MA 01610, USA;1. Grand Valley State University, United States;2. Florida State University, United States;3. Michigan State University, United States;1. California State University, Monterey Bay, Seaside, CA 93955, United States;2. California State University, San Marcos, San Marcos, CA 92096-0001, United States;3. DePaul University, Chicago, IL 60604, United States;4. Shidler College of Business, University of Hawai''i at Mānoa, Honolulu, IL 96822, United States;1. Nova Southeastern University, 3301 College Avenue, Davie 33314, United States;2. University of Waterloo, Waterloo, ON N2L 3G1, Canada;3. University of Kansas, 1300 Sunnyside Av, Lawrence, KS 66045, United States |
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| Abstract: | This paper examines the effect that information technology (IT) investments have on the industry cost of equity capital. We find that industry IT intensity, defined as the relative amount of IT investment to total fixed asset expenditures, is negatively related to the industry cost of equity capital. These results indicate that industries with higher levels of IT investment have lower cost of equity capital. We also find that the relation between IT intensity and cost of equity capital changes over time. Initially, investors viewed IT investments as risky ventures and demanded higher levels of cost of equity (or higher return on their investment) for those industries investing in IT. However, beginning in the 1980s, as IT became more reliable, more cost effective, and had the ability to transform businesses, investors viewed IT Intensity as a positive business strategy with less associated risks and reduced their required cost of equity capital (or lower return on their investment). Extrapolating from our industry results, IT investments allow firms to potentially raise capital at a lower price so they have more assets to employ, indicating that IT investments can be a key factor for business success. |
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