ABSTRACT
Abstract: In this chapter, we apply contemporary financial analysis methods to the measurement of information technology (IT) business value. IT contributes to business value by changing and enhancing business processes. Embedding IT in business processes or more effective uses of IT should show up in improved accounting measures of performance, which subsequently affect financial market measures of firm value. Thus, an assessment of IT’s impact on firm performance must consider IT’s effect on specific business processes and how those processes affect overall firm performance. First, we propose value chain analysis to assess the impact of IT investments on business processes and the selection of appropriate accounting-based process measures. Then, we describe the link between process performance measures and overall firm performance measures such as return on equity (ROE). ROE decomposition provides further insight into the contribution of IT to business value. The residual income model is then used to link ROE directly to firm value. The framework is demonstrated using thirty-two high-tech manufacturing firms that adopted IT-based supply chain management systems. Our empirical contribution is to illustrate how ROE decomposition methodology can be used to find value from IT investments. In particular, this methodology integrates disparate parts of the business value framework into a comprehensive model for empirical analysis of the performance changes around the adoption of new IT investments.
