Information Technology Capability: Firm Valuation, Earnings Uncertainty, and Forecast Accuracy

Abstract

Prior literature argues that information technology (IT) capability, an organization's ability to effectively use IT-based resources in combination with other organizational resources, can create unique and sustainable competitive advantages and thus intangible assets for a company. However, current accounting rules do not allow the capitalization of IT-enabled intangible assets. We hypothesize that IT-enabled intangible assets are value-relevant and provide incremental explanatory power for firm valuation beyond traditional accounting information. IT capability is inherently risky as it is subject to implementation challenges, technological complexity, and innovative integration of IT investments with other organizational resources. Thus, we argue that IT capability is positively associated with future earnings uncertainty and decreased analyst forecast accuracy. Using InformationWeek 500 ranking index as a proxy for IT capability, we find evidence supporting these hypotheses. This study contributes to the growing literature on IT capability.