Setting IT Standards: The Effect of Coalition Size on the Risk and Return Profiles of Participants

Abstract

IT standards are sometimes set by a single firm and sometimes set by a group of firms. One reason to do things in groups is to share risk. We theorized that setting standards in a group changes the stock returns and risk profiles of the group members. We tested our theory using a sample of 789 observations over the ten year period 1996-2005, and found that increasing the number of firms in the standard setting process decreases risk adjusted abnormal return and market risk, but increases idiosyncratic risk. Our findings have important implications for management in deciding on strategies in starting or participating in standard setting initiatives. This study contributes to the literature in IT standards and standardization, and expands our understanding of the implications of standardization strategy on shareholder risks.

Keywords: Standard, Standardization, Standard setting, Event study, Returns on IT investment, Risk of IT investment

JEL Classification: C23, E44, G14, D40, D71, O14, O32, O34