The Dynamics Information Technology and Systematic Risk

Abstract

Systematic risk is the degree to which a firm is sensitive to changes in the overall economy. It is a core concept in finance theory, and is an important measure of firm performance. While much research has looked at the relationship between IT and direct risk measures such as earnings volatility, research is lacking on this core outcome. Additionally, we know from prior research that impacts from IT can change over time. Therefore, we examine the association between information technology and systematic risk over time. We investigate this association using a sample of 2,417 firm-years from 659 unique firms over the years 2003-2007. We find that increased levels of IT intensity are associated with greater systematic risk contemporaneously but result in significant reductions in systematic risk associated with three- and four- year lagged effects. We propose that this occurs due to intangible capital formation and increased flexibility.