The Association between Financial Information System Development and Implementation Costs and Firm Value: Further Evidence of Payoff from it Investments
Posted: 13 Dec 2001
Date Written: December 6, 2001
Abstract
A number of researchers have examined the elusive notion of firm-level information system effectiveness and the results have produced mixed results. This study contributes to this debate by making use of a newly mandated disclosures required by the Securities and Exchange Commission (SEC) concerning the amount of fees paid to a firm's auditors toward developing and implementing a financial information system (FIS). A well-developed FIS is a pre-requisite for obtaining timely feedback on operating performance and for making appropriate corrective actions to preserve a firm's competitive advantage. Other benefits of a FIS include enhanced productivity and profitability in the form of reduction in inventory, reduced headcount in accounting function, and strategic planning capability. Based on a subset of Standard & Poors 500 firms that collectively spent more than $336 million on FIS related fees, we find that FIS development and implementation costs are associated with Tobin's q, a measure of business performance and firm value. We also find that this association is stronger for firms that tend to rely heavily on IT to conduct their businesses. Our findings are consistent with the notion that cost of developing a FIS is a value-adding activity even though those costs are required to be expensed under generally accepted accounting principles (GAAP). Our findings support the recent decision by the SEC to mandate disclosure of IT-related consulting fees paid to the auditors.
Keywords: Business value of information technology; financial information systems; Non-audit services; Valuation; Productivity paradox
JEL Classification: M41, M49, G12
Suggested Citation: Suggested Citation