Academic journal article Journal of Theoretical and Applied Electronic Commerce Research

The Impact of Radio Frequency Identification (RFID) Investment Announcements on the Market Value of the Firm

Academic journal article Journal of Theoretical and Applied Electronic Commerce Research

The Impact of Radio Frequency Identification (RFID) Investment Announcements on the Market Value of the Firm

Article excerpt

Abstract

This paper examines the impact of RFID investment announcements on the market value of the firms and explores industry effects of the positive abnormal returns to firms making the announcements. Drawing upon the efficient market theory, market signaling hypothesis, and prior empirical studies, we employ event study methodology to analyze RFID investment announcements over a six-year period from 2001 to 2006. In this paper, we present preliminary results that demonstrate an overall positive abnormal return to RFID investment announcements over the three-day event window. In addition, industry differences in market returns to RFID investment announcements are observed with a greater return realized in the manufacturing sector and specifically in the information technology industry segment and for technology vendors' investment initiatives. These preliminary findings provide useful implications for a better understanding of the benefits of RFID adoption and for making decisions in RFID investment and adoption to create value for the firms.

Key words: RFID Investment, Event Study, Market Value, Industry Effects, Announcement

(ProQuest: ... denotes formulae omitted.)

1 Introduction

Effective supply chain management (SCM) has been a focus of many organizations. In today's hypercompetitive business environment, companies often make significant investments in developing integrated supply chain strategies to ensure that all the functions and activities involved in the value chain are working together harmoniously and to attain competitive advantages [18]. As supply chain networks become more mature and complex, the needs for more efficient supply chain technology solutions have also increased dramatically [20]. Radio Frequency Identification (RFID) has recently received significant attention as a viable option in an organization's supply chain management (SCM) strategy. RFID is an automatic identification technology that uses radio waves to uniquely track individual objects including items, animals, or even humans [26]. RFID is expected to provide greater collaboration capabilities across value chains given its ability for real-time identification and tracking over long distances without line-of-sight requirements. Other major benefits of RFID in SCM include labor reduction throughout the supply-chain network and better inventory management that can yield significant cost savings and improved data collection with greater accuracy [2], [17].

Despite the fact that the promises of RFID technology seems to be compelling and some even believe RFID will fundamentally transform the way of doing business, the adoption rate is rather moving at modest pace [5]. For instance, the warehouse study reported that only 15% of warehousing firms had adopted RFID while 41% responded considering the adoption and 44% not considered the adoption at all [14]. Surprisingly, a primary reason for the adoption of RFID in those firms was because that Wal-Mart had made the adoption of RFID mandatory for its top suppliers to start tagging their merchandises. For many suppliers, they have to comply because Wal-Mart is the largest customer for many of them, although the current tag prices never seem to be cost-effective. Furthermore, many firms who are considering the adoption of RFID are yet positioned where they take "wait and see" approach. Since proposed benefits of RFID is still uncertain while it requires significant up-front investment, many companies rather put off their investment decision and hope to learn more from the early adopters [22].

In order to address the discrepancy between expected and realized benefits of RFID investment, IS researchers have studied issues such as potential benefits and risks [17], relationships in a supply chain [7], [26], and key success factors of adopting RFID [24]. Despite an abundance of theoretical perspectives of RFID investment, there is still a lack of study that empirically assesses the impact of RFID investment by early adopters. …

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