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Sat, Nov 4, 3:30 - 3:55, Normandy B Paper (refereed)

Recommended Citation: Boasson, V and E Boasson. The Study of Risk and Returns on Investments in Information Technology. In The Proceedings of the Information Systems Education Conference 2006, v 23 (Dallas): §3545. ISSN: 1542-7382.

The Study of Risk and Returns on Investments in Information Technology

Refereed

10 pages

Vigdis Boasson    [a1] [a2]
Finance, School of Business
Ithaca College    [u1] [u2]
Ithaca, New York, USA    [c1] [c2]

Emil Boasson    [a1] [a2]
Business Information Systems Department, Master of Science in Administration Program
Central Michigan University    [u1] [u2]
Mount Pleasant, Michigan, USA    [c1] [c2]

Information Technology (IT) investments are the largest capital budgeting item among most knowledge-and technology-intensive corporations. There is significant interest among both researchers and practitioners in understanding the relationship between IT investments and stock returns. This paper examines the role of information technology investments in asset pricing and investigates whether investments in information technology (IT) innovation can yield better stock returns on a risk-adjusted basis. Specifically, we investigate the risk and returns on the investment in IT innovations among the publicly traded investment banking companies. From an investor’s perspective, can we make a better return by picking those companies that are actively engaged in IT innovations on a risk-adjusted basis? We compute the Sharpe ratio –a reward-to-risk ratio for each stock in the investment banking sector over a ten-year period from 1994 through to 2003. We adopt a multi-factor model Cahart (1997) to analyze and explain the risk and returns of the firms ranked high on IT innovations versus those firms ranked low on IT innovations. By tying the investment in IT innovations to stock market returns, we shed lights and insights on the question whether investors can gain a better return on a risk-adjusted basis by selecting those companies that are the front-runners in IT innovations.

Keywords: information technology investment, risk and returns, investment banking

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