Information technology investments and nonfinancial measures: A research framework

Abstract

Despite the substantial growth of IT investments, evidence on their impact on firm performance remains inconclusive. An important management question is whether anticipated economic benefits of IT investments are being realized. The intangible benefits obtained from IT are not captured by accrual-based accounting measures alone, and, therefore, call for a comprehensive measure that focuses on segments of performance influenced by IT investments. This study proposes a framework that utilizes nonfinancial measures to link IT investments to their intangible benefits and applies the agency theory to examine the contribution of IT investments by tying managerial compensation to firm value.

Keywords:

• Nonfinancial measures
• IT investments
• Intangible benefits
• Firm performance
• Agency theory

Notes

1 The negative effect of IT investments in current accounting performance measures is due to the fact that the majority of IT investments are immediately expensed under U.S. GAAP.

2 Capitalizing or expensing software development costs is determined by whether the project under development has reached the technological feasibility stage. SFAS 86 specifies that costs involved in software creation shall be charged to expense when incurred until technological feasibility has been established for the product. All software production costs incurred subsequent to achieving technological feasibility must be capitalized.

3 Street earnings exclude a variety of intangible investments that would have been fully expensed under GAAP.

4 Service quality is the gap between customers’ expectations and their perceptions.