Information Technology Effects on Firm Performance as Measured by Tobin's q

TLDR

Although anecdotal evidence links IT assets to firm performance, studies relying on accounting measures have yielded equivocal results and often overlook IT’s role in strategic flexibility and intangible value. The study investigates the relationship between IT investments and firm Tobin’s q values. Using Tobin’s q as a market‑based performance metric, the authors control for industry factors and firm‑specific variables. Across 1988–1993, IT expenditures significantly increased the variance explained in Tobin’s q and were positively associated with q values, supporting the view that IT enhances firms’ future performance potential.

Abstract

Despite increasing anecdotal evidence that information technology (IT) assets contribute to firm performance and future growth potential of firms, the empirical results relating IT investments to firm performance measures have been equivocal. However, the bulk of the studies have relied exclusively on accounting-based measures of firm performance, which largely tend to ignore IT's contribution to performance dimensions such as strategic flexibility and intangible value. In this paper, we use Tobin's q, a financial market-based measure of firm performance and examine the association between IT investments and firm q values, after controlling for a variety of industry factors and firm-specific variables. The results based on data from 1988–1993 indicate that, in all of the five years, the inclusion of the IT expenditure variable in the model increased the variance explained in q significantly. The results also showed that, for all five years, IT investments had a significantly positive association with Tobin's q value. Our results are consistent with the notion that IT contributes to a firm's future performance potential, which a forward-looking measure such as the q is better able to capture.