High-Quality Information Technology and Capital Investment Decisions

Abstract

ABSTRACT We examine the effect of high-quality information technology (IT) on management's capital investment decisions. Evaluating capital investment decisions with contemporary investment efficiency and long-term measures of investment effectiveness, we document a positive relation between high-quality IT and capital investment decision quality. In particular, we find high-quality IT is associated with more optimal levels of investment as well as fewer future fixed asset write-downs. We also disaggregate investment efficiency and find the relation with IT quality holds for investment decisions related to capital expenditures and acquisitions, but not research and development expenditures. Overall, our results suggest managers equipped with better internal information from higher-quality IT are able to make superior capital investment decisions. Our study contributes to the literature by providing evidence of a significant determinant of capital investment decision quality and documenting a specific mechanism that mediates the indirect effect of IT quality on future performance. JEL Classifications: D83; E22; G31; M15; M41. Data Availability: We thank InformationWeek for providing annual rankings that were previously published. All other data are publicly available from regulatory filings; we obtained data from the Compustat, Execucomp, and I/B/E/S databases.