Effect of Information Technology Investments on Customer Satisfaction: Theory and Evidence

Abstract

This paper studies the effect of aggregate IT investments on customer satisfaction and profits at the firm level. Using data on 109 U.S. firms for the 1994-1996 and 1999-2006 periods, we find that aggregate IT investments have a positive association with customer satisfaction. However, the strength of the relationship varied across the 1994-1996 and 1999-2006 periods. Specifically, IT investments had a more positive influence on customer satisfaction for the 1994-1996 period than for the 1999-2006 period. Conversely, IT investments had a positive effect on profits in the 1999-2006 period but a negative effect in the 1994-1996 period. These findings extend prior discourse in the information systems literature on the role of customer satisfaction as a mechanism that explains how IT-enabled benefits are “passed on to consumers” [Rai, A., Patnayakuni, R., and Patnayakuni, N. 1997. Technology investment and business Communications of the ACM (40:7), p. 90]. Our additional exploratory analyses showing that IT investments had stronger effect on perceived quality than on perceived value provide an explanation for some of the observed effects of IT on customer satisfaction and profits. Together, these contributions and implications provide new insights to assess returns on IT investments by focusing on customer satisfaction, an important intangible and leading measure of firm performance, stock returns and stock risk.