The effect of information asymmetry and firm risk on the market reaction to information technology announcements

Date

2016-08

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Abstract

Over the last few decades, many studies have explored how IT announcements affect firm market value. However, the market reaction to IT announcements involves a complicated process. This study investigates the moderating effects of information asymmetry and firm risk components on the market reaction to different types of IT announcements. As the previous IT event studies paid limited attention to the possibility that IT announcements change information asymmetry, and firm risk, a special emphasis has been placed on the potential interaction effects of these information asymmetry, and firm risk components on the relation between IT announcements and the company’s subsequent market value. Text mining methods are utilized to automatically classify the original IT announcements into different categories. An event study methodology is used to examine the direct impact of IT announcements on firm values. The moderating effects of information asymmetry, and firm risk components on the market reaction to different types of IT announcements is determined by a cross-sectional analysis. I found overall the stock market reacts positively to IT investment, and outsourcing investments while negatively to security breach announcements. Except the significant impact of IT investment, and security breach announcements on trading volume, the impact of IT announcements on information asymmetry and firm risk are not detected. This study will provide a finer level of granularity on how the market reacts to different types of IT announcements by considering the effects of information components. The findings of this study will be of particular interest to those responsible for strategic choices regarding IT disclosure decisions.

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Keywords

IT Announcements, Information Asymmetry, Firm Risk, Stock Price

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