US scientists warn investors to be careful
vnunet.com, 02 Jan 2008
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.
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