How Firms Make Information Technology Investment Decisions: Toward a Behavioral Agency Theory

Abstract

While prior research has established that information technology (IT) investment has a significant impact on firm performance, relatively few studies have provided insights into the antecedents of IT investment decisions. By integrating the behavioral theory of the firm and agency theory, we propose a behavioral agency theory to explain performance shortfalls and corporate governance, which monitors and controls managers’ tendency of overinvestment or underinvestment in IT, as key drivers that jointly determine IT investment. As such, IT investment facilitates a firm’s problemistic search that generates innovation in response to performance gaps. We further examine the role of innovation outputs as a mediating mechanism linking IT investment to firm performance. Our econometric analysis of a large-scale panel dataset provides empirical evidence corroborating our theory. Overall, this study contributes a behavioral agency theory to deepen our understanding about performance drivers and outcomes of IT investment decisions.