Corporate Governance and the Returns to IT Investment

by Joanna Ho

The impact of information technology (IT) on firm performance has conflicting results. Prior studies indicate that IT investment improves, reduces, or has no effect on firm performance. Given this extremely mixed summary of results, there is much debate on the relationship between firm performance and IT investment. Similar to Sanjeev Dewan and Vidyananand Choudhary, Joanna Ho and her research team investigate the conflicting results and the relationship between firms’ performance and their IT investments. More specifically, they investigate how corporate governance shapes the IT investment-firm performance relationship.

They examine the relationship between shareholders’ decisions and IT investments in publicly traded companies in emerging markets in their study “Corporate Governance and Returns of Information Technology Investment: Evidence from an Emerging Market” (Joanna Ho, Anne Wu and Sean Xu).

IT investments seldom act alone but work in conjunction with other corporate resources to create value for shareholders. The study is based on the premise that corporate governance should play a significant role in the IT investment-firm performance. In the study, they define corporate governance as “the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment.” Specifically, they address the role of corporate governance in high-tech industries in Taiwan, an emerging market.

Starting in 2001, the Taiwanese government conducted annual surveys of the top 2,000 companies to better understand their IT investments, along with public information on all Taiwanese public firms. This provided a unique opportunity for the researchers to use archival data to assess the role of corporate governance in IT.

The key findings of this study are related to the independence of boards. Board independence positively moderates the relationship between IT investment and firm performance. While shareholders expect IT investment to improve firm performance through increasing operational efficiencies or productivity, IT managers often act in their self-interest at the expense of the firm’s value. Managers may make excessive IT investments because a large IT department brings power and high salaries, or enhance their professional reputations. They may also invest in “new” IT trends without considering the benefits or how to manage the legacy assets. An independent board can monitor more effectively and is more objective.

The moderation effect of board independence in the IT investment-firm performance relationship is more positive for more competitive industries than for less competitive industries. Under competition, companies tend to make IT investments by following suit without a thorough cost-benefit analysis. Therefore, in the IT-performance context, the monitoring function of independent boards is more crucial in more competitive industries.

Foreign ownership positively moderates the relationship between IT investment and firm performance. The implication is that foreign ownership might be able to offer expertise in deploying IT resources and have spillover effects. In the IT investment setting, foreign investors’ knowledge and experience can help a domestic firm use IT more effectively. The moderation effect of foreign ownership in the IT investment-firm performance relationship is more positive for small firms than for large firms. Large firms have more expertise in deploying IT resources than small firms because they can afford to hire major consulting firms to provide specialized services and offer expert advice. Since foreign investors can contribute their IT expertise and enhance board structure, foreign ownership may strengthen a small firms’ ability to generate value from deploying IT.

This study offers insights into why prior literature has reported mixed findings on the IT-performance relationship. It also reveals the implications for board composition. The interaction between board independence and IT investment is significantly associated with better firm performance. Finally, the results demonstrate that board independence only exists in more competitive industries. An important implication of the study is that competitive firms should be more proactive in using IT to increase business value. Yet they conclude that IT alone does not hold the answer to performance improvement and must be combined with better and more objective monitoring to reap the benefits.