How Do Bondholders View Risks Associated with IT Investments across Industries?

Posted: 16 Oct 2013

See all articles by Keongtae Kim

Keongtae Kim

Decision Science and Managerial Economics, Chinese University of Hong Kong

Sunil Mithas

University of South Florida

Michael D. Kimbrough

University of Maryland - Robert H. Smith School of Business

Date Written: October 15, 2013

Abstract

Motivated by the bond market's important role as the single largest source of financing for U.S. firms, this study investigates bondholders' assessment of the value of investments in information technology (IT) by examining the association between IT investment and initial bond ratings and bond yields. The results indicate that the impact of IT on the cost of debt is different across industries. Bondholders appear to view IT investments in automate and informate industries more favorably than those in transform industries. These findings from the bond markets differ from equity-based prior findings which report higher returns to IT investments in transform industries. Additional analyses indicate that IT investments are associated with higher returns as well as higher risks in transform industries than in automate or informate industries. Overall, these findings suggest that bondholders and shareholders have different perspectives toward IT investments likely due to bondholders' greater aversion to the riskiness and the lack of collateralizability of IT investments.

Keywords: IT investments, bond market, credit rating, yield spread, IT strategic role

Suggested Citation

Kim, Keongtae and Mithas, Sunil and Kimbrough, Michael D., How Do Bondholders View Risks Associated with IT Investments across Industries? (October 15, 2013). Robert H. Smith School Research Paper, Available at SSRN: https://ssrn.com/abstract=2340716 or http://dx.doi.org/10.2139/ssrn.2340716

Keongtae Kim (Contact Author)

Decision Science and Managerial Economics, Chinese University of Hong Kong ( email )

12 Chak Cheung street
Shatin
Hong Kong

Sunil Mithas

University of South Florida ( email )

Tampa, FL 33620
United States

Michael D. Kimbrough

University of Maryland - Robert H. Smith School of Business ( email )

Robert H. Smith School of Business
College Park, MD 20742-9157
United States
301-405-8222 (Phone)
301-314-9414 (Fax)

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