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Abstract:
This paper conducts an empirical investigation of the relationship between information asymmetry and earnings management predicted by Dye (1988) and Trueman and Titman (1988). When information asymmetry is high, stakeholders do not have sufficient resources, incentives, or access to relevant information to monitor manager's actions, which gives rise to the practice of earnings management (Schipper (1989) and Warfield et al. (1995)). Empirical results suggest a systematic relationship between the magnitude of information asymmetry as measured by bid-ask spreads and analyst forecast dispersion and the level of earnings management in both a broad sample setting and in a time-specific setting around seasoned equity offerings.

Abstract:
We examine the market reaction to a sample of 403 restatements announced from 1995 to 1999. We document an average abnormal return of about -9 percent over a two-day announcement window. We find that more negative returns are associated with restatements involving fraud, affecting more accounts, decreasing reported income and attributed to auditors or management (but not the SEC). There appears to be an additional penalty for announcements that do not quantify the restatement. Finally, we provide evidence on the relation between restatement announcements and analyst earnings forecast dispersion, bid-ask spreads and subsequent revisions in analyst earnings forecasts.

misstatements, fraud, auditor

Abstract:
We examine the market reaction to a sample of 403 restatement announcements made from 1995 to 1999. We find significantly negative average abnormal returns of about 9 percent over a two-day announcement window. We also document substantial variance in the abnormal returns. Our analysis indicates that more severe reactions are related to indications of management fraud, more material dollar effects and restatements that are attributed to auditors. We hypothesize that the negative signal associated with fraud and auditor-initiated restatements is associated with an increase in investors' expected monitoring costs, while higher materiality is associated with greater revisions of future performance expectations.

Restatement; Stock market reaction; Fraud; Audit; Auditor; SEC

Abstract:
We show that the intangible asset, firm reputation, has value-relevance as measured by its ability to explain part of the difference between BV and MV. Firm reputation is measured using the Fortune survey of "America's most admired companies." We allow the Fortune rankings to serve as a proxy for nonfinancial information, such as customer service and intellectual capital. We demonstrate this summary measure of nonfinancial information adds to market value, even after controlling for the financial performance halo effects on the Fortune ratings.

Abstract:
This paper documents the value-relevance of nonfinancial information on the quantity and quality of inventive output for high-tech companies. We find that the number of patents and information on the quality of patents have consistently positive effects on stock prices. Interestingly, this information does not appear to diminish the value-relevance of accounting data on the firm's financial performance and R&D expenditures. Like findings reported by Amir and Lev (1996) for the wireless communications industry, these results suggest an important complementary relation between traditional financial information and nonfinancial data in the high-tech sector. The findings also lend credence to the suggestion of the AICPA Special Committee on Financial Reporting that firms disclose nonfinancial performance measures to provide insight into a company's operations. In particular, patent statistics concerning the quantity and quality of inventive output appears to sharpen the investor's perception of the ongoing value created by the firm's inventive and innovative activity.

Abstract:
Understanding the return on investments in information technology is the focus of a large and growing body of research. The objective of this paper is to synthesize this research and develop a model to guide future research in the evaluation of information technology investments. We focus on archival studies that use accounting or market measures of firm performance. We emphasize those studies where accounting researchers with interest in market-level analyses of systems and technology issues may hold a competitive advantage over traditional IS researchers. We propose numerous opportunities for future research. These include examining the relation between IT and business processes, and business processes and overall firm performance, understanding the effect of contextual factors on the IT-performance relation, examining the IT-performance relation in an international context, and examining the interactive affects of IT spending and IT management on firm performance.

information technology, literature review, performance measures, returns, market measures, accounting measures, research opportunities

Abstract:
Understanding the return on investments in information technology is the focus of a large and growing body of research. The objective of this paper is to synthesize this research and develop a model to guide future research in the evaluation of information technology investments. We focus on archival studies that use accounting or market measures of firm performance. We emphasize those studies where accounting researchers with interest in market-level analyses of systems and technology issues may hold a competitive advantage over traditional IS researchers. We propose numerous opportunities for future research. These include examining the relation between IT and business processes, and business processes and overall firm performance, understanding the effect of contextual factors on the IT-performance relation, examining the IT-performance relation in an international context, and examining the interactive affects of IT spending and IT management on firm performance.

Information technology, Literature review, Performance measures, Returns, Market measures, Accounting measures, Research opportunities

Abstract:
This study provides empirical evidence that capital markets participants believe e-commerce activity subjects companies to incremental firm-specific risk. We identify and measure proxies for e-commerce risks using a diverse sample of Internet and other firms. We first investigate investors' reactions to "hacker" attacks launched against several of the best-known Internet firms in February 2000. After excluding three firms in our sample that are known subjects of the attacks, we investigate whether remaining sample firms experienced "contagious" negative abnormal stock returns following the attacks. We find that the extent of negative abnormal returns is associated with several of the e-risk metrics. Investors appear to believe the likelihood a firm will be subject to similar attacks is positively related to its self-disclosed vulnerability to e-risks, and to its designation by outsiders as an Internet firm. The negative abnormal returns observed are substantial in magnitude and do not reverse over time.

The second risk assessment employed consists of financial stress scores provided by Dun & Bradstreet (D&B). We investigate whether D&B financial stress scores are significantly associated with Internet activity and e-risk metrics, while controlling for conventional (financial) measures of risk. We find that D&B give less favorable scores to "B2B" Internet firms, and to Internet firms disclosing controllable e-risks. Evidence also suggests that non-Internet firms disclosing e-risks receive less favorable D&B scores.

Overall the results suggest that reducing controllable e-risks would decrease the cost of debt and equity for Internet firms and, to a lesser extent, for non-Internet firms subject to e-risks.

Electronic commerce, risk

Abstract:
This study investigates companies' decisions to disseminate financial information at their corporate Internet Web sites. We expect that companies tailor the selection of data items presented at their sites to the relative sophistication of their user base. Based on prior literature, we predict which financial information items are likely to be preferred by analysts, proxying for sophisticated users, or by retail investors, who are generally less sophisticated users. Consistent with our hypotheses, the results suggest that the information provided at Web sites varies systematically with companies' levels of analyst following and retail ownership. Higher levels of analyst following are associated with relatively objective, more extensive data, and higher levels of retail ownership are associated with relatively subjective, more abbreviated information.

Abstract:
We predict and find evidence that firms undergoing layoffs substitute equity-based compensation for bonus compensation to avoid the heightened public scrutiny associated with both layoffs and high executive compensation levels. We also document that observed substitution varies with the strength of the CEO position. More precisely, we find that CEOs in weaker positions face substantial bonus reductions during layoff years, while powerful CEOs are protected from bonus decreases. Further, we document that equity-based compensation for both types of CEOs increase in layoff years. Finally, to rule out the possibility that the preferential treatment received by powerful CEOs is due to ability and/or experience, we examine post-layoff performance and find that the performance of firms managed by powerful CEOs is not superior to that of other firms. Collectively our results are consistent the managerial power theory (Bebchuck et al. 2002).

CEO Compensation, Layoffs, Political Costs

Abstract:
This study focuses on the stock market reaction to denial of service attacks against certain well-known Internet firms in February 2000. Investors appear to have used several heuristics in deciding which firms were 'similar' to those attacked, and thus predicted that they were also likely to be attacked themselves in future. The primary heuristic employed appears to have been similarity in reliance on the Internet to conduct operating activities (i.e., the set of Internet firms). We find negative mean abnormal returns among Internet firms not actually attacked (i.e., information transfer). This occurred both within Internet industries in which some firms were attacked, and within Internet industries in which no firms were attacked. A secondary heuristic appears to have been that Internet firms similar in size to those attacked (i.e., relatively large) were more likely to be attacked in future. In contrast to all other Internet industries, providers of Internet security products and services experienced positive mean abnormal returns.

Abstract:
Together with the number of patents and the value of R&D expenditures, scientific measures of patent quality give investors a useful basis upon which to judge the economic merit of the firm's inventive and innovative activity. Especially in the case of small cap and relatively low P/E high tech companies, we find a favorable stock-price influence when both the number of patents, the scientific merit of those patents, and R&D spending is high. Patent quality information also appears germane in the case of large cap high-tech companies with relatively high P/E ratios. In short, patent citation information may indeed help investors judge the future profit-earning potential of a firm's scientific discoveries.

Patents, patent citations, market value, research and development

Abstract:
The purpose of this study is to analyze the potential benefits that firms realize from implementing technology specifically aimed at monitoring and assuring the effectiveness of their internal control systems. As asserted by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), approaches to effective internal control monitoring are expected to enhance the efficiency and effectiveness of the internal control process, and in turn the assurance over such processes (COSO 2009a). We develop hypotheses and test to find whether these potential benefits are realized. Specifically, we employ a natural experiment whereby we identify a sample of firms that implemented specific internal control monitoring technology (ICM technology) in response to the internal control requirements of the Sarbanes-Oxley Act (SOX). Consistent with our hypotheses, and after controlling for factors identified by recent research, our analysis documents that implementation of ICM technology is associated with lower likelihood of material weaknesses, smaller increases in audit fees, and smaller increases in audit delays during the post-SOX time period. We discuss the potential implications of our findings on the research areas of continuous monitoring/auditing, client-provided assurance assistance and IT governance.

Internal Control Monitoring, Material Weakness, Audit Fees, Audit Delays

Abstract:
Managers face tradeoffs. On one hand, CEOs make IT spending decisions in anticipation of generating competitive advantages and productivity improvements. On the other hand, CEOs realize the risky nature of IT spending and its immediate negative effect on current income. Boards of directors, recognizing the potential long-term contribution of IT to firm value, should thus structure its CEO compensation packages to encourage strategic IT spending. To test this proposition, we examine the relation between IT spending and various components of CEO compensation and assess its impact on firm value. Our empirical results suggest that IT spending is positively related to ratio of equity to total CEO compensation. This result is consistent with the notion that boards of directors understand that payoffs to IT are uncertain and, hence, tie CEO compensation to the long-term results by placing greater weight on equity compensation. Furthermore, we find that boards of directors shield CEOs' cash compensation from the earnings decreasing effects of IT expense to mitigate potential underinvestment in IT. Finally, we conclude that the synergistic relationship between IT spending and CEO equity compensation is positively associated with firm market value. Bridging the two research streams of business value of IT and CEO compensation, our study contributes to the literature by examining how ties between IT and CEO compensation contracts impact firm value.

IT Investments, CEO compensation, Shielding

Abstract:
This study provides a current assessment of the impact of various Information Systems (IS) articles, and the productivity of IS researchers and institutions. Using a data set of Information Systems articles that spans 15 years, we conducted a scientometric study of the field. The articles are drawn from three premier IS journals. We use citation analysis to demonstrate the impact of articles on institutions and individuals in the IS field. In addition, we identify IS topics with the highest impact. The results indicate that leading productive institutions have changed over time, and problematically, institutions outside of North America are poorly represented. We compare our results with earlier productivity findings created using alternative metrics.

research productivity, citation analysis, scientometrics, bibliometrics, information systems

Abstract:
In this study we examine the influence of premier information systems research over time to assess the maturity of the Information Systems (IS) field and its impact on subsequent IS and non-IS research. 19,357 citations from the Social Science Citation Index (SSCI) (1982-2004) are attributed to 879 articles published in MIS Quarterly (MISQ), Information Systems Research (ISR), and the IS articles from Management Science (MS) between 1982 and 2004, and this number continues to increase over time. The results suggest that research in premier IS journals has an influence on other disciplines as 7,137 citations come from outside the IS discipline and this number continues to increase over time. Of particular note is the consistent increase over time in citations of premier IS research articles from the management, engineering and physical sciences, organizational behavior, and computer science disciplines. Given recent debates regarding the IT artifact, we also directly test the impact of articles that address the IT artifact and those that do not. We find that articles that directly address the IT artifact are cited significantly more often than those that do not, consistent with arguments made by Benbasat et al. [2003].

Citation analysis, IT artifact, scientometrics, bibliometrics, information systems, IS field

Abstract:
This paper examines the financial benefits of information technology investments around newly adopted IT-based supply chain management (SCM) systems by 123 manufacturing firms over the period 1994-2000. We form hypotheses using the value chain to specify the expected financial impact of SCM systems. By examining the change in financial performance pre- and post-adoption controlling for industry median changes in performance, we find that SCM systems increase gross margin, inventory turnover, market share, return on sales, and reduce selling, general, and administrative expenses. We also provide a model showing how process improvements around supply chain initiatives combine to improve overall performance. Finally, we show that contextual effects such as firms in the high-tech industry and the scope of the supply chain implementation have dramatic effects on the overall financial performance resulting from supply chain implementations.

Information technology, Supply chain management, Firm performance, Value chain, Manufacturing

Abstract:
Previous research has shown that investments in intangible assets, especially research and development, can increase the difficulty in forecasting a company's earnings. This information risk translates into a lower market value for the firm. Because IT investments have many intangible characteristics similar to research and development expenditures, information technology investments may also increase information risk. Tests using IT spending data for over 1000 firms show that IT spending does increase earnings forecast dispersion and error. Increased dispersion and error might affect the market value of the firm. Using a residual income valuation model, results show that as IT spending increases, residual income is capitalized into market value at a decreasing amount, controlling for diminishing marginal returns to IT spending. This research highlights the importance for IT-intensive companies to find ways to decrease information risk through other forms of communication with market participants.

Information technology, Analyst forecasts, Market value, Information risk

Abstract:
This study reexamines the value relevance of e-commerce announcements using an event study methodology. Event studies have become an increasingly popular technique for information systems research by giving researchers a tool to measure the notoriously elusive value of information technology. We find evidence that the traditional event study methodology may not provide an accurate measure of abnormal returns during periods of high market volatility, and propose an alternative methodology. The alternative methodology does not use an estimation period, and takes into account extreme or unusual market movements in the period in which the e- commerce announcement was made. Using the alternative methodology, we find evidence of positive abnormal returns for e-commerce announcements made in the fourth quarter of 1998, but no abnormal returns to e- commerce announcements made in the fourth quarter of 2000. We also find significant differences in value depending on the type of e-commerce initiative. In 2000, e-commerce initiatives with a digital product were valued significantly more than e-commerce initiatives with a tangible product, while in 1998 no such difference existed. In 1998, business-to-business e-commerce initiatives, e-commerce initiatives with a tangible product, and e- commerce initiatives by pure-play Internet firms were valued more than similar initiatives in 2000. The study makes a significant contribution for understanding the value of e-commerce initiatives in highly volatile markets and demonstrates how market values of e-commerce changed from 1998 to 2000. Furthermore, this study shows the importance of carefully considering both the time frame examined and the methodology used when assessing the value relevance of e-commerce initiatives as to avoid inflating the magnitude of any observed effects.

business value, e-commerce announcements, electronic commerce, event study, market value

Abstract:
This paper both confirms and extends the value relevance of information technology (IT) announcements found by K.S. Im et al. (2001) and B.L. Dos Santos et al. (1993). We extend their work by proposing that an overarching construct, the strategic IT role in an industry, accounts for the factors previously found to affect the stock market response to IT announcements. These results provide support for the value of capturing the nature of an industry's IT-related competitive maneuvering in studies striving to understand the conditions under which IT investments are likely to produce out-of-the-ordinary, positive returns.

IT investments

Abstract:
Our objective in this paper is to develop a firm value model to assist IT managers and researchers in understanding the multiple effects that IT investments have on firm value. This firm value approach adds to the process-oriented approach through simultaneous evaluation of all of the factors that affect firm value. It is crucial for IT professionals to recognize the complex and diverse implications of IT investments on firm value. The implications of the firm value approach include forcing IT managers to think in terms of both industry and company-specific effects of IT investments, to consider both the magnitude and duration of competitive advantage due to IT investments, and the implications of the effect that IT investments have on risk and its relation to firm value. We demonstrate an application of the firm value framework by evaluating a major stream of research in MIS--event studies of IT investment announcements.

IT Investments, Firm Value

Abstract:
For most firms, the information technology (IT) budget represents a major element in the overall firm budget, and IT budget decisions often have significant operational and strategic impacts on the business processes in the firm's value chain. In this paper we use a large unique data set to examine the extent to which IT budgets are affected by environmental, organizational, and technological circumstances. We find that our cross-sectional model explains substantial variance in IT budgets, which indicates that contingent environmental, organizational, and technological factors affect managers' budget decisions. We then examine the extent to which these IT budget levels are related to future firm performance, measured using both broad financial accounting measures, such as operating profit margins and return on assets, and market returns. We find that IT budget levels are positively associated with subsequent firm performance and shareholder returns. We further suggest that IT's aggregate effect on performance is a weighted average of two very different components: 1) context-driven IT budget levels, which reflect the effects of environmental, organization, and technological factors and the IT budgets resulting from them, and 2) idiosyncratic IT budget levels, which reflect the effect of any marginal firm-specific IT budget expenditures after controlling for these contextual factors. Both components are positively associated with performance, indicating that the specified contextual factors provide an incomplete explanation of firms' value-relevant IT expenditures. The current study contributes to the accounting information systems and management accounting literatures by assessing the causes and consequences of IT budgets.

IT budgets, firm performance, resource allocation

Abstract:
In this study we examine the influence of premier information systems research over time to assess the maturity of the Information Systems (IS) field and its impact on subsequent IS and non-IS research. There are 19,357 citations from the Social Science Citation Index (SSCI) (1982-2004) made to 879 articles published in MIS Quarterly (MISQ), Information Systems Research (ISR) and the IS articles from Management Science (MS) between 1982 and 2004 and this number continues to increase over time. The results suggest that research in premier IS journals has an influence on other disciplines as 7,137 citations come from outside the IS discipline and this number continues to increase over time. Of particular note is the consistent increase over time in citations of premier IS research articles from the management, engineering and physical sciences, organizational behavior and computer science disciplines. Given recent debates regarding the IT artifact, we also directly test the impact of articles that address the IT artifact and those that do not. We find that articles that directly address the IT artifact are cited significantly more often than those that do not, consistent with arguments made by Benbasat et al. (2003).

Citation analysis, IT artifact, scientometrics, bibliometrics, information systems field, journal influence

Abstract:
This paper examines the moderating effects of firm and IT characteristics on the market reaction to IT investment announcements. A special emphasis has been placed on the potential interaction effects of these two types of variables, since the previous event studies have paid limited attention to the possibility that they interact and jointly alter investors' perceptions in relation to IT investment announcements. Very recently, several authors have noted the importance of interaction effects on theory development for IS research. Their assessments are particularly relevant to IT-value event studies, since the market reaction to IT investment announcements involves a complex process shaped by the interaction of firm and IT characteristics. Based on the previous studies in IS, finance and accounting, a firm's growth potential and uncertainty are used as proxies to represent firm characteristics, while IT strategic role and asset-specificity of IT are chosen as the variables reflecting IT characteristics. Three other variables (discloser information, firm size and industry) are included to control for their effects. We develop eight hypotheses based on the examinations of the main and interaction effects of firm and IT characteristic variables on the shareholder's reaction to IT investment announcements.

The results of the main effects indicate that a firm's growth prospects, uncertainty, the strategic role of IT and discloser information are significantly related to cumulative abnormal returns (CARs), while no significant effect was observed for asset-specificity of IT resources. Interestingly, however, interaction effects reveal that the stock market reacts with a discount to announcements of IT investments that are characterized as highly asset-specific in the presence of uncertainty. In addition, the market reacts more favourably to investments with a transformational IT strategic role when the firm faces greater uncertainty. One of our main contributions in this study is to provide a finer level of granularity with regard to the market reaction to IT investments by considering the interaction as well as the main effects of firm and IT characteristics.

IT investment, firm characteristics, IT characteristics, market reaction, information economics, interaction effects

Abstract:
Current accounting rules end regular amortization of goodwill and mandate annual tests for goodwill impairment and loss recognition, when appropriate. These rules make consideration of goodwill write-offs important and timely. In the study reported here, we found that the effects of goodwill write-off announcements were typically negative and material - on the order of -2.94 percent to -3.52 percent of the company's stock price. What makes goodwill write-off announcements especially noteworthy for investors is that additional effects of roughly -11.02 percent were realized by the end of a one-year post-announcement period. These results suggest that investors initially underreact to goodwill write-off announcements and that they need to be aware of the potential for further losses in the post-announcement period.

Equity Investments: fundamental analysis and valuation models; Financial Statement Analysis: financial accounting standards and proposals; Investment Theory: behavioral finance

Abstract:
The rapid evolution of Internet technology has created the ability to disseminate new information nearly instantaneously to a world-wide audience. However, traditional accounting communications are becoming increasingly untimely and irrelevant. Investors can wait for financial statements for as long as 90 days while auditing requirements and reporting processes delay their delivery.

To remain relevant, accounting reports must become more timely. The advent of the Internet, with its immediacy and worldwide reach has inspired calls for real-time on-line reporting that is available to all stakeholders. However, there are significant obstacles to achieving this goal. Technological problems with preparing reliable real-time data are daunting, but can be overcome as out-dated legacy systems are replaced with properly implemented enterprise systems. Likewise, continuous auditing processes that can monitor and enhance the reliability of such systems must be completed, but this is mainly a matter of time and investment.

On the other hand, overcoming inhibitions arising from the potential legal liability associated with disclosing new information will require legislative or regulatory intervention. Policy makers should consider using both the carrot of specific, meaningful safe harbor protections and the stick of mandating progressively more timely information releases.