Business Value of Information Technology Capabilities: An Institutional Governance Perspective

Abstract

Situated in the U.S. electric utility industry in a period of significant market restructuring, our study investigates how market valuations of a firm’s investments to develop intrafirm and interfirm information technology (IT) capabilities are conditional on regulatory context. We find that firms are rewarded by investing in intrafirm IT capabilities in a more deregulated context, and by investing in interfirm IT capabilities in a more uncertain regulatory context. When deregulation expands customer choice, intrafirm IT capabilities create value by enabling greater efficiency and service reliability through coordination of a firm’s internal activities. When regulatory uncertainty increases for key aspects such as price control, value chain configuration, and information control, interfirm IT capabilities create value by enabling greater flexibility through reduction of external transaction costs with customers and suppliers. When allocating resources to develop IT capabilities, executives need to consider that market valuation of IT capabilities development is not static, but dynamic with changes in market structure and regulatory uncertainty. Regulators also need to consider that the regulatory context that they shape through their deliberations and decisions has a substantial impact on the market valuation of investments by firms to develop different types of IT capabilities.