IT investments at fortune 1000 companies riskier than ordinary capital investments: Study

December 30th, 2007 - 12:06 pm ICT by admin  

Washington, December 30 (ANI): A study of Fortune 1000 companies led by two Indian-origin researchers at the University of California at Irvine suggests that investments in information technology carry more risk than other capital investments.

Sanjeev Dewan and Vijay Gurbaxani worked with their colleague Charles Shi during the project.

They noted that investment decisions are guided by both expected returns and incremental risks, yet very little is known about the risk that comes with information technology (IT) investments, which make up an increasingly dominant component of firms capital asset portfolios.

Writing about the study in Management Science, the flagship journal of the Institute for Operations Research and the Management Sciences (INFORMS), the authors said that IT investments were substantially riskier than ordinary capital investments, and that IT risk was associated with a substantial risk premium.

According to them, this risk premium is driven in part by the lost option value of making irreversible capital investment decisions.

The authors say that a key implication of the findings is that managers should apply a substantially higher discount rate while evaluating IT investments relative to other types of less risky capital investments.

They add that the results suggest that the timing of IT capital investment is a critical factor in managing both the risks and returns of IT investments. (ANI)

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