Employing the Event Study to Assess Returns to Firms from Novel Information Technologies: An Examination of E-Commerce Initiative Announcements

The event study is an important methodology in management research that enables the assessment of value attributable to firm initiatives based on the responses of capital markets to news about firm actions. While capital markets are efficient in processing information about firms, their ability to rapidly determine future benefit streams linked to initiatives involving novel information technologies such as ecommerce technologies may be limited by several factors. There is considerable ambiguity related to benefits from novel technologies and their effects on industries, markets and firms in the short term. At the time of the announcement, relevant information is also not available on complementary initiatives influencing value such as such as changes to business processes, willingness of supply chain partners to make complementary changes etc. Adjustments of stock prices over longer windows are thus likely to reflect more informed assessment of the ability of firms to generate benefits and to appropriate value created by novel information technologies than those within a few days of the event. We examine the returns to e-commerce events in the period from 1999 to 2000 employing a set of short time windows (1-day, 5-days, 10-days bracketing the event) as well as a set of long event windows (6-month, 9-month and 1-year from the event). The results reflect little consistency between abnormal returns in short 1-day, 5-day and 10-day event windows. In contrast, the abnormal returns observed in 6, 9 and 12-month windows, though slightly different are reasonably consistent. Further, the variation of short-run abnormal returns across the two year period appear to be suspiciously similar to the fluctuations of market sentiments related to the Internet, indicating that extraneous, non-firm-specific factors may be very influential in determining short term abnormal returns than is recognized by researchers. We suggest that using longer time windows in event studies involving novel technologies enable reliable assessments of the contributions of events to firm value. The results of the analyses employing a 1-year time window indicate that e-commerce announcements are associated with significant abnormal buy-and-hold returns of 9.51%. Significant abnormal returns are associated with events of conventional firms (11.38%), those that are B2B (20.55%), initiatives involving tangible goods (13.39%) and initiatives that are components of incremental firm strategies (11.43%). These results suggest that e-commerce technologies are significant sources of value for firms; these results are consistent with the overall conclusions of prior research on the issue. Overall, this paper contributes both to the substantive examination of returns from e-commerce events and to the application of event study methodology to examine outcomes linked to novel information technologies by researchers.