This paper compares the mean and variance of cumulative abnormal returns following announcements of two types of information technology (IT) investments: those which entail the "exploitation " of firm's current capabilities vs. those which involve the exploration of new capabilities. The paper addresses two understudied questions in research on the contribution of IT to firm performance: the contingent nature of those contributions and the impact on risk (or variance), as well as on return (mean). To examine these questions I first performed a standard event study analysis on a sample of 150 announcements of IT investments made by 59 publicly-traded retailers between the years 1990-1997. I performed two types of multivariate regression analysis on the event returns: ordinary least squares (to assess the impact of the two types of investments on the mean level of returns) and multiplicative heteroscedastic regression (to determine the impact on the variance of the returns). The results indicate that, as expected, IT investments "exploitative" IT investments have the same mean as, yet lower variance than, abnormal returns associated with "exploratory" IT investments. Somewhat unexpectedly, I found that both types of IT investments had a significantly negative impact on the market value of the firm. Taken together, these findings suggest that the characteristics of IT investments themselves, as well as the industry and strategic context within which they were made, are important determinants of the market value of the firm. As such, the results of this study should be of interest to researchers interested in the contribution of IT to firm performance and to MIS professionals both in the retailing sector, in particular, and other service sectors, more generally.
Recent empirical work has identified several organizational, strategic, and environmental factors that influence whether, how, and to what extent information technology (IT) investments impact firm performance. These include, but are not limited to: "IT capability", i.e. the firm-specific, managerial resources and capabilities required to manage IT investments (Bharadwaj, Sambamurthy, and Zmud 2001; Bharadwaj 2000); "intangible assets", i.e. the investments in "training, and organizational transformation" that accompany IT investments (Brynjolfsson, Hitt, and Yang 2002); characteristics of the organizational tasks, processes, and functions to which IT is applied (Barua, Kriebel, and Mukhopadhyay 1995); complementary organizational designs and human resource management practices (Brynjolfsson and Hitt 2000); the management goals or strategic intent for IT investments, e.g. whether or not they were intended to achieve "competitive advantage" (Weill 1990); organizational form (Subramani and Waiden 2001) and size (Im, Dow, and Grover 2001); industry characteristics such as the level of "information intensity" (Dos Santos, Peffers, and Mauer 1993) and the degree of "IT-driven transformation" (Chatterjee, Richardson, Zmud 2001); as well as, characteristics of the investments themselves, e.g. their "innovativeness" (Dos Santos, Peffers, and Mauer 1993).
One contingency which has yet to be examined is that of organizational learning, i.e. how organizations learn from experience (March, Sproull, and Tamuz 1991). March (1991, 1995) has propounded a theory of organizational learning which describes two distinct, yet complementary, ways in which organizations learn and, thereby, change their performance. He terms them "exploration" and "exploitation" (March 1991, p. 71). Although the theory contains many testable propositions about the causal relationship between learning and performance, it has yet to be applied to the study of the consequences of information technology on firm performance. The theory has, however, recently been used in the strategic management literature to explain the impact of organizational learning on financial performance (Sorenson and Sorensen 2001; Sorensen 2002; Rothaermel 2001) and technological evolution (Rosenkopf and Nerkar 2001). …