Risk and Return of Information Technology Initiatives:

Evidence from Electronic Commerce Announcements

Abstract

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 tradeoff 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 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 post-event increase in 1998 and 2000, while 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