Analysts' Forecasts and Investments in Information Technology

International Journal of Accounting Information Systems, Vol. 7, Issue 3, pp. 238-250, September 2006

Posted: 26 Feb 2009

See all articles by Bruce Dehning

Bruce Dehning

Chapman University - The George L. Argyros School of Business & Economics

Glenn Pfeiffer

affiliation not provided to SSRN

Vernon J. Richardson

University of Arkansas at Fayetteville

Date Written: November, 20 2008

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.

Keywords: Information technology, Analyst forecasts, Market value, Information risk

JEL Classification: M15, M41, O14

Suggested Citation

Dehning, Bruce and Pfeiffer, Glenn and Richardson, Vernon J., Analysts' Forecasts and Investments in Information Technology (November, 20 2008). International Journal of Accounting Information Systems, Vol. 7, Issue 3, pp. 238-250, September 2006, Available at SSRN: https://ssrn.com/abstract=1304924

Bruce Dehning (Contact Author)

Chapman University - The George L. Argyros School of Business & Economics ( email )

333 N. Glassell
Orange, CA 92866
United States

Glenn Pfeiffer

affiliation not provided to SSRN ( email )

Vernon J. Richardson

University of Arkansas at Fayetteville ( email )

401 WCOB
Fayetteville, AR 72701
United States

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