How Does Internal Communication Technology Affect Internal Information: Theory and Evidence

Abstract

We study how enhanced internal communication technology influences firms' internal information production. By developing a model with a headquarters manager and several divisional managers, we formalize two competing economic forces—information learning and free riding—that shape the headquarters manager's information precision. While the technology helps the headquarters manager collect information from divisional managers, it also reduces divisional managers' incentives to acquire information because they anticipate others will do so. To test the theory's predictions, we use firms' intranet usage as a proxy for advancements in internal communication technology and management forecast accuracy as a measure of internal information quality. Our empirical analysis reveals an inverted U-shaped relation and provides supporting evidence for the two economic forces in our model. Collectively, our findings offer novel insights into the trade-offs organizations face as they adopt advanced communication technologies and contribute to understanding the evolving dynamics of internal information production.

Keywords: organizational communication, communication technology, internal information environment

JEL Classification: D80, D83, L20, M15, M21, M41