Dynamic Adjustment Of Information Technology, Corporate Governance, And Firm Profitability

Authors: John Qi Dong, Prasanna Karhade, Arun Rai, Sean Xin Xu

European Conference on Information Systems (ECIS 2013)

Abstract

How do managers make their decisions with regard to adjustment and deployment of information technology (IT) over time? Motivated by this complex dynamics, we draw on behavioral theory of the firm and theorize a bounded rational process of managerial decision making for IT investment. In particular, we explain the dynamic adjustment of IT investment by bounded rational managers’ pursuing of satisfaction. When performance feedback of prior profitability is below their aspiration, they become unsatisfied and adjust IT investment to facilitate problemistic search directed toward innovative solutions to performance problems. As a result, performance problems will be solved and future profitability can be improved. We also deepen our understanding by theorizing the contingency of above dynamics based on the possibility of agency problems and the appropriateness of corporate governance mechanisms, which is largely omitted in behavioral theory. We further draw on agency theory and examine the moderating roles of different corporate governance mechanisms (i.e., incentive alignment versus monitoring) in the effects of IT investment on problemistic search and rent generation. By using a recent, large-scale panel data set, we find that managers are indeed bounded rational and dynamically adjust IT investment over time based on performance feedback. We also find that incentive alignment outgoes monitoring in directing managerial decision making toward innovating with and generating rent with IT investment. Novel theoretical and practical implications are discussed.

Keywords: dynamic adjustment of IT investment, dynamics of managerial decision making, IT innovation, corporate governance, behavioral theory of the firm, agency theory.