IT Applications, Financial Analyst Recommendations, and Firm Stock Market Value

This paper examines the mediating role of analyst recommendations in the effect of annual IT investment on annual abnormal stock returns. While the influence of IT on stock market value has been studied in prior literature, there is a need to better understand how stock market investors come to know about intangible assets represented by firms' IT capabilities. In theory, since IT investments contribute to firm productivity and profitability, it could be that the stock market valuations reflect IT investments indirectly only after IT assets generate tangible performance effects. But that wouldn't explain the immediacy of the observed relationships between IT and firm market value, nor would it explain the fact that the relationships appear even after controlling for tangible performance factors. Thus, advancing prior research on the internal perspectives of IT value creation, we take an external view and investigate the role of stock analysts in facilitating the market evaluation of firms' IT applications. Stock analysts collect information about firms' IT applications and provide informed recommendations to investors in the financial market. As IT applications are known for their complexity and inherent risks, stock analysts can reduce information asymmetry between the firm and investors in the financial markets, thus helping discovering the business value of IT applications. On the basis of Fortune 1000 firms between 1996 and 2007, our analysis suggests that stock analysts play an intricate mediating role in the stock market evaluation of IT applications. Analyst recommendations have a strong mediating role in the effects of enterprise IT systems (ERP and CRM) on firm market value, but a weak to insignificant mediating role in the effects of function IT systems (DSS, HR and AIS). In addition, we find that the mediating role of financial analysts for IT applications is more salient when the firm's market environments are more uncertain and unpredictable. These findings suggest that analyst recommendations play a critical role in the stock market valuation of firms' IT applications in situations where the value of such investments is difficult to assess