IT investments present 'substantial risk'

A study of Fortune 1000 companies shows that investments in IT carry a higher risk than other capital investments.

A report by Sanjeev Dewan, Charles Shi and Vijay Gurbaxani of the University of California at Irvine found that IT investments are "substantially riskier " than ordinary capital investments.

The study has been published in the current issue of Management Insights in the journal Management Science.

IT investments are associated with a "substantial risk premium" driven in part by the lost option value of making irreversible capital investment decisions.

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

The results also suggest that the timing of IT capital investment is a critical factor in managing the risks and returns.

• Management Science Report: Investigating the Risk–Return Relationship of Information Technology Investment: Firm-Level Empirical Analysis