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Risk and Return of Information Technology Initiatives: Evidence from Electronic Commerce Announcements

The Paul Merage School of Business, University of California, Irvine, Irvine, California 92697
Guanghua School of Management, Peking University, Beijing 100871, China
sdewan{at}uci.edu
fren{at}gsm.pku.edu.cn

This paper takes an event study approach to jointly examine the wealth and risk effects associated with electronic commerce announcements, contributing to the emerging research on the riskiness of IT investments and the trade-off between risk and return in the information systems literature. We estimate a generalized event study model that allows for both systematic and unsystematic risk changes on data collected for electronic commerce announcements in the 1996–2002 time frame. A striking result emerging from our analysis is that wealth effects are not significant after controlling for contemporaneous risk changes. Both total and unsystematic risk show a significant postevent increase in 1998 and 2000, whereas systematic risk adjusts downward in 1996 and 2002. Put together, our results contribute to our nascent understanding of how IT initiatives affect the risk-return profile of the firm.

Key Words: IT risk; risk and return; electronic commerce; IT event study; wealth effects; risk effects
History: This paper was received on April 13, 2005.