IT Capabilities & Organizational Performance

RESEARCH NOTE
INFORMATION TECHNOLOGY CAPABILITY AND FIRM

PERFORMANCE: CONTRADICTORY FINDINGS AND
THEIR POSSIBLE CAUSES1
Ho-Chang Chae
Department of Finance, Accounting, and Information Systems, Gary E. West College of Business, West Liberty University,
West Liberty, WV 26074 U.S.A. {ho-chang.chae@westliberty.edu}
Chang E. Koh and Victor R. Prybutok

Department of Information Technology and Decision Sciences, College of Business, University of North Texas,
Denton, TX 76203-5017 U.S.A. {Chang.Koh@unt.edu} {prybutok@unt.edu}
Several studies support the positive link between information technology capability and firm performance,
including Bharadwaj (2000) and Santhanam and Hartono (2003), which appeared in MIS Quarterly. We
conducted a study to see if this link is still statistically significant. It is now over a decade since the first study
was published, during which several significant developments in the IT industry have taken place. Unlike the
1990s, when proprietary information systems prevailed, the 2000s are characterized by more standardized and
homogeneous information systems and with the rapid adoption of ERP and web technologies. Thus, we
attempted to reexamine the link between IT capability and firm performance with data from the 2000s.
Surprisingly, the results of our current analysis showed no significant link between IT capability and firm
performance. Contrary to earlier studies, IT leader firms in our study didnt show better financial performance
than control firms. We discuss several possible causes for the change in findings and present an in-depth
comparison in business performance between the two groupsIT leader and controlover a period extending
from 1991 to 2007.
Keywords: IT capability, firm performance, IW 500, IT business value
Introduction1
Understanding the economic impact of information technology is a critical issue to information systems researchers,
and there is a rich body of literature about IT value (Chan
2000; Dehning and Richardson 2002; Kohli and Devaraj
2003; Mahmood and Mann 2000; Melville et al. 2004; Wade
and Hulland 2004). Despite some skepticism about the direct
1
Soon Ang was the accepting senior editor for this paper. Eric Walden
served as the associate editor.
The appendices for this paper are located in the Online Supplements
section of the MIS Quarterlys website (http://www.misq.org).
effect of IT on firm performance (Carr 2003; Clemons 1986,

1991; Clemons and Row 1991; Powell and Dent-Micallef
1997), many IS researchers believe that superior IT capability
can render a firm a significant competitive advantage over its
competitors. However, as Nicolas Carr argued in his Harvard
Business Review article in 2003, several significant developments in the IT industry in the 2000s may have eroded the
competitive edge resulting from being an IT leader with
superior IT capability. Unlike the 1990s when proprietary
information systems prevailed, the 2000s are characterized by
more standardized and homogeneous information systems
because of the rapid adoption of ERP and web technologies
(Wang 2010). It has become easier for companies to catch up
MIS Quarterly Vol. 38 No. 1 pp. 305-326/March 2014
305
Chae, Koh, & Prybutok/IT Capability and Firm Performance
with or even exceed the IT capabilities of their competitors

(Masli et al. 2011). In addition, easy access to outsourcing,
particularly offshore outsourcing, allows firms to significantly
reduce IS development time and cost, making advanced IT
capabilities more affordable to less IT savvy firms. With this
backdrop, it is natural to ask if IT capabilities still hold the
same value today as they did in the past. Thus, we embarked
on a study that examined whether being an IT leader in the
2000s is still as significant a factor in determining business
performance as it was in the 1990s. Also, if it is, how have
the benefits of being an IT leader changed from the early
1990s to the 2000s?
There are several studies that tested the link between IT capability and organizational performance. Among them, research
by Bharadwaj (2000), cited by 2,171 studies according to
Google Scholar, is one of the most noted studies that provide
convincing evidence for the relationship between IT capability and firm performance. The study found that firms with
superior IT capability (IT leaders) demonstrated better business performance than their counterparts. Based on the
resource-based view (RBV), it contends that the IT leader
firms can leverage IT related resources to create a unique IT
capability, which can be a source of competitive advantage
that generates superior business performance. To empirically
test the contention, it then identified and compared two
groups of firms: (1) the IT leader group of firms considered
to have superior IT capabilities and selected from Information
Week 500 (IW 500) from 1991 to 1994 and (2) the control
group of firms deliberately chosen to match individual IT
leader firms in terms of size and industry. The study found
that the IT leader group showed significantly higher profits
and lower costs than the control group. A follow-up study by
Santhanam and Hartono (2003) extended the Bharadwaj study
and reaffirmed that the IT leader group demonstrates superior
performance to that of the control group. Furthermore, it also
learned that the competitive advantage from IT capability can
be sustained over a period of time.
However, these studies were conducted with data from the
early 1990s, and we wondered if their findings still hold true
after over a decade of rapid and widespread change in IT and
the way organizations use IT. Thus, we updated these studies
with new data from the early 2000s. Replications and updates
are an important aspect of scientific endeavor because they
test the robustness of a theory and solidify tentative beliefs
into accepted knowledge (Santhanam and Hartono 2003).
However, replicative studies are generally underutilized by
the research community (Berthon et al. 2002). We believe
that examining and reexamining what has been scientifically
studied and reported is particularly important to the research
community.
306
MIS Quarterly Vol. 38 No. 1/March 2014
In the following subsections, we summarize the early studies

in terms of their methods and findings. Then, we report the
process and the results of our study in which we updated the
aforementioned studies that empirically confirmed the link
between IT capability and business performance.
Study by Bharadwaj in 2000

Drawing from the resource-based view of competitiveness,
Bharadwaj argues that IT capability can be firm specific, rare,
difficult to imitate or substitute, and can become an important
source of differentiation and a competitive advantage. To
prove her contention, she tested whether the IT leaders with
superior IT capability are associated with greater business
performance by comparing the business performance of firms
with superior IT capability with that of corresponding control
companies. She chose the firms with superior IT capability
from the InformationWeek 500 listings from 1991 to 1994.
The control companies were selected from Standard & Poors
Compustat database. Each individual control company was
chosen to closely match the corresponding IT leader company
in terms of industry and revenue. The comparisons between
IT leaders and control companies revealed that IT leaders had
superior performance in terms of both profits and costs.
Study by Santhanam and Hartono in 2003

Santhanam and Hartono conducted a follow-up study to
address several methodological issues identified in Bharadwaj. First, Bharadwaj used a matched sample comparison
method, but the results of the method may have been influenced by how the researcher selected a control company from
a potential set of firms that fit the selection criteria. To
address this issue, Santhanam and Hartono used the average
performance measures of all firms in the industry as a control
sample instead of a single control company. Nevertheless,
their findings corroborated the original study.
In addition, they further investigated the financial halo effect
that may have inadvertently influenced the outcome of the
study by Bharadwaj. The financial halo effect refers to the
potential bias due to past financial performance in the selection of firms with superior IT capability. In other words, the
superior business performance that IT leaders showed may
have been an outcome of their prior business performance
rather than that of their superior IT capability itself. They
believed that the way Bharadwaj handled the financial halo
effect was not sufficiently cautious, so they conducted an
additional test of the link between IT capability and firm
performance on the assumption that that the financial halo
effect does exist.
Finally, they tested the sustained effects of IT capability.

They examined whether or not superior IT capability offered
superior business performance over an extended period of
time. They found that IT leaders show higher profit ratios and
lower cost ratios than control samples in the subsequent years.
Current Study
It is important to answer whether superior IT capability
continues to offer a competitive advantage in the 2000s.
Since the early 1990s, the IT industry has undergone numerous significant changes, such as the dot-com bubble, the Y2K
transition, and rapid adoption of web technologies (Wang
2010). During that time, IT became more homogeneous and
ubiquitous. On balance, these changes made it easier for
companies to imitate and even exceed their competitors IT
capabilities. Some even suggest that IT no longer offers any
competitive advantage and has become an operational commodity or even a competitive necessity (Carr 2003). Therefore, these suggestions call for reexamination of the findings
of those studies that link superior IT capability to superior
business performance. Given the significant influence of
Bharadwaj and of Santhanam and Hartono on the IS community, this study updates and extends these studies using
more recent data while using the same research methods. We
believe that our approach is important to accumulate IS
knowledge (Berthon et al. 2002). Table 1 summarizes the
comparison of this study to the previous two studies. The
constructs in the research model and hypotheses are discussed
in the following section.
Hypotheses
IT Capability and Firm Performance
IT capability of a firm encompasses IT infrastructure, human
IT resources comprised of technical and managerial IT skills,
and IT-enabled intangibles such as knowledge assets, customer orientation, and synergy (Bharadwaj 2000). Companies
can improve their business performance by leveraging their IT
capability to increase revenues, reduce costs, or both (Porter
2001). First, IT capability can increase product differentiation, resulting in higher revenues and profits using web technologies (Hitt and Brynjolfsson 1996). For instance, some
banks have created information and financial services to
create a Web site that allows the banks to differentiate their
products and services (Tan and Teo 2000). They can generate
new revenue from advertising, referrals, and commissions
from their Web partners. Additionally, firms with superior IT
capability increase their revenue by obtaining valuable

resources such as patents (Fahy and Hooley 2002).
Second, superior IT capability is potentially an important
source for reducing marketing cost by increasing switching
costs and customer loyalty. Even if IT becomes more available and homogeneous, firms with superior IT can impose
switching costs on customers and thus induce their loyalty.
For example, banks may increase switching costs and
customer loyalty with a feature-rich Internet banking system.
A customer accustomed to an array of integrated products and
services offered by an Internet banking system may become
reluctant to switch to other banks.
Furthermore, superior IT capability can allow a firm to gain
exclusive access to customer information and their preferences and reduce the search costs for future business (Straub
and Watson 2001). This proprietary information can be a
valuable resource for a firm in expanding its business into a
new business area without incurring a heavy toll (Sampler
1998). These are just a few examples of how IT capability
impacts a firms business performance by either increasing
revenues or reducing costs in the Internet age. Therefore, the
following hypotheses are proposed:
H1: The average profit ratios of firms that have superior IT
capability in the 2000s are higher than the average profit
ratios of all control firms.
H2: The average cost ratios of firms that have superior IT
capability in the 2000s are lower than the average cost
Sustainability of IT Capability
and Business Performance
The question of the sustainability of successful business performance due to superior IT capability over the long run has
become more important and more difficult to answer. Unlike
the early days of IT, when proprietary information systems
prevailed, the modern IT environment is characterized by
highly standardized and homogeneous IS applications because
of the rapid adoption of ERP and web technologies. Such
standardization makes it easier for a firm to counter and even
outdo its competitors IT capability. Other developments
such as outsourcing, offshoring, and readily available web
search engines significantly reduce IS development time and
cost (Porter 2001). All of these developments are making ITbased competitive advantages short-lived (Carr 2003). Nevertheless, some believe that a firms superior IT capability still
offers sustainable benefits because the associated learning
307
Table 1. Comparisons Between Earlier Studies and Current Study

Sample
Benchmark
(Control Group)
Bharadwaj
(2000)
IT leaders from
19911994 IW 500
listings
IT leader versus control

company of similar size
and industry
Business performance measured by profit and cost

ratios from 1991 to 1994
Santhanam
and Hartono
(2003)
IT leaders from
19911994 IW 500
listings
IT leaders versus
industry average

Sustainability of superior business performance from
1995 to 1997
This study
IT leaders selected
from 20012004
IW 500
IT leaders versus
control companies of
similar size and industry

Sustainability of superior business performance from
2005 to 2007
Studies
curve is nontrivial and represents considerable time and effort

that competitors must overcome (Bhatt and Grover 2005).
The early acquisition of valuable human IT resources and ITenabled intangibles such as knowledge assets is likely to
reinforce IT competence and capabilities and result in a positive impact on IT projects (Barney 1991; Bharadwaj 2000;
Mata et al. 1995; Melville et al. 2004; Santhanam and
Hartono 2003; Wade and Hulland 2004).
Despite the new IT environment that makes it easier for firms
to acquire applications, a firms IT capability is likely to be
related to sustained business performance, so the following
hypotheses are proposed:
ratios of all control firms in subsequent years.
Financial Halo Effect

Prior studies found that popular industry rankings such as
Fortunes Most Admired Companies are highly influenced by
prior financial performance (Brown and Perry 1994), and the
impact of past financial performance on a reputation survey
is called a financial halo effect. In her study, Bharadwaj conducted a test to ensure that the IT capability of a firm rather
than its prior financial performance influenced its selection as
an IT leader, and she found no financial halo effect. It is
important to guarantee that a firm is selected as an IT leader
based on its superior IT capability, and not on its prior finan-
308
Measures
cial performance. Otherwise, the comparisons of business

performance between IT leaders and control companies can
be questioned. It becomes difficult to pinpoint whether it is
superior IT capability that indeed contributes to better performance of IT leaders over its competitors. In fact, a capable
company tends to perform well over a long period of time
regardless its IT capability.
In their 2003 paper, Santhanam and Hartono further elaborated on the issue of the financial halo effect. They pointed
out that Bharadwajs test of a financial halo effect on selection of IT leaders may be not sufficient because she used the
average financial performance of the prior five years, despite
the fact that a firms immediate past performance most influences the ranking. Thus, they argued that the impact of IT
capability be retested using a more rigorous and conservative
method by adjusting prior financial performance. In their
study, they proved that their concern was legitimate because
the significantly better performance of IT leaders over the
control samples shown in the pair-wise comparison test
became dramatically weak when they adjusted prior financial
performance in their test.
Consistent with Santhanam and Hartonos approach, we want
to ensure that IT capability is the one factor that differentiates
between IT leaders and control companies, not prior financial
performance. Therefore, we need to perform additional tests
to control the impact of prior financial performance on results,
so we propose the following hypotheses:
ratios of all control firms after adjusting for prior financial performance.
Figure 1. Hypotheses

ratios of all control firms after adjusting for prior
financial performance.
H7: After adjusting for prior financial performance, the average profit ratios of firms that have superior IT capability
in the 2000s are higher than the average profit ratios of
all control firms in subsequent years.
H8: After adjusting for prior financial performance, the average cost ratios of firms that have superior IT capability
in the 2000s are lower than the average cost ratios of all
control firms in subsequent years.
Figure 1 summarizes our research hypotheses.
Method
We used Bharadwajs matched sample comparison group
method to empirically test the proposed hypotheses. This
method selects a treatment sample and a control sample and
compares the levels of interest variables between the two
groups. In this study, the treatment sample is comprised of
the IT leaders with superior IT capability, and the control
sample is comprised of the firms matched to the treatment
sample based on similar size and industry. After that, we
compared the average performance measures of IT leader
firms to those of the matched firms.
Sample Selection: IT Leaders

and Control Firms
IS researchers have been interested in identifying IT leaders
with superior IT capability, and for many years they have
used the Information Week 500 to identify IT leaders. Each
year since 1989, Information Week (IW) has selected 500
companies as leaders in business technology innovation.
Since the first publication of the IW 500 list, the selection
criteria have constantly evolved to reflect changing business
and technological developments and to fine-tune its benchmarking power. Despite the constant change in selection
criteria, IW 500 is regarded as a reliable barometer for firms
IT capability and has been used in prior academic studies
(Bharadwaj 2000; Hitt and Brynjolfsson 1996; Santhanam and
Hartono 2003; Stoel and Muhanna 2009).
The firms with superior IT capability are those listed in IW
500 from 2001 to 2004. To select the firms with enduring IT
capability, the IT leader sample was restricted to firms listed
in IW 500 for at least two of the four years. This yielded a
list of 561 firms.
From the set of potential control firms in the same industry as
the IT leaders, the matching control companies were chosen
with the closest five-year average sales level to that of the IT
leaders. As Bharadwaj suggested, the average sales of the
control firm must be within 70 percent to 130 percent of those
of the leader firm. That is, the control company should be in
the same industry as the IT leader, and its average sales from
1996 to 2000 must be between 70 percent and 130 percent of
the leaders average sales from the same period. Out of the
309
Table 2. Steps of Sample Selection

Step
Procedure
Identify companies listed in the IW 500 from 2001 to 2004
Restrict the IT leader sample to those that were listed at least twice in the IW
500 from 2001 to 2004
561
Select IT leaders with comparable companies
296
561 IT leaders, only 296 have compatible control companies

with similar industry and firm size. Table 2 summarizes how
we selected the samples, and Appendix A lists the IT leader
companies and the corresponding control companies used in
the study.
Using the control firm in the same industry and of similar size
is critical for several reasons. First, operating performance
varies widely by industry and firm size. By using the
matching samples, the variance of performance influenced by
the difference in industry and firm size can be minimized. In
addition, the literature in accounting suggests that firm size
and industry type are strong predictors of the choice of
accounting methods and process used to compute costs such
as depreciation and amortization (Bharadwaj 2000). Therefore, the impact of variance in accounting methods can be
controlled, and the direct comparison of profitability and cost
ratios becomes more reliable.
Since a firms size can significantly influence the firms IT
budget, the two groups were compared to ensure that there are
no significant differences in firm size (Bharadwaj 2000).
Commonly used measures such as sales, total assets, and
number of employees were used. Table 3 provides the information on average sales, assets, and the number of employees
of these two groups. Means test (t-test) indicates no significant differences in average sales, assets, and the number of
employees between the IT leader groups and the control
groups.
It is important to note that we deliberately chose a single
control (benchmark) firm for each IT leader firm, and unlike
Santhanam and Hartono, we didnt consider all of the other
firms in that industry as the benchmark for comparison.
Choosing a single benchmark firm from a potential set of
firms that fit the selection criteria, as Santhanam and Hartono
pointed out, can be vulnerable to the way that researchers
randomly select individual control firms. In spite of that concern, we decided to use only a single control company as the
benchmark for comparison for several reasons. First, unlike
the previous two studies with only 56 leadercontrol pairs,
this study employs a larger sample with 296 pairs. Thus, the
310
Number of Companies
2,000
choice of benchmark firms becomes less problematic because

the impact of a single benchmark firm may not be substantial
in an analysis involving a large number of firms. Second, the
wide range of firm sizes present in most industries raises a
question of whether or not it is appropriate to use all of the
firms in the industry as the benchmark for comparison.2 As
Table 3 shows, IT leader firms are quite large, with average
sales of $9.8 billion and total assets of about $35 billion, but
in reality smaller-size firms are more prevalent in the industry.
In fact, our analysis revealed that IT leaders are two times
larger than the average size of all other firms in their respective industries. As we stated earlier, the firm size directly
impacts IT budgets and resources, and it is likely that IT
leaders have more IT resources than other firms in the
industry. Finally, direct comparisons between IT leaders and
control firms of similar size enable strong and reliable
statistical tests because the matching eliminates the issues
associated with firm size, their different IT budgets, or subtle
accounting maneuvers in amortization and depreciation that
may impact their net income.
Measurements
This study uses the same variables as Bharadwaj to measure
business performance. Bharadwaj defined superior business
performance by higher profit ratios and lower cost ratios as
measured by eight variables. As for the profit ratios, the
following five variables were measured: (1) return on assets
(ROA), (2) return on sales (ROS), (3) operating income to
assets (OI/A), (4) operating income to sales (OI/S), and
(5) operating income to employees (OI/E). The operating
income was not clearly defined in Bharadwajs study, so we
used earnings before interest payment and taxes (EBIT) as the
operating income. Three cost related ratios were also compared: (1) total operating expenses to sales (OPEXP/S),
(2) cost of goods sold to sales (COG/S), and (3) selling and
2
Nevertheless, we also performed the analysis using the alternative benchmarking method in which an industry average is used as a control measure
instead of a single firm to see if there is any significant difference between
the two methods.
Table 3. Comparison Between the IT Leader Group and the Control Group
Descriptive Variables
Sales (billion $)
Assets (billion $)
Number of Employees (thousand)
IT Leader Sample
Mean
Median
9.823
3.968
35.397
4.850
36.482
17.250
Control Sample
Mean
Median
9.721
3.934
34.186
5.532
34.595
17.086
T-test for Difference

of Means
T
0.066
0.132
0.385
Table 4. Summary of Constructs and Measurement

Category
Independent
variable
Constructs
IT Capability
Dependent
variables
Superior Business
Performance
Definition
A firms ability to assemble,
integrate and deploy ITbased resources.
Higher profit and lower cost
than the control group.
Sustained
Superior Business
Performance
Sustained higher profit and

lower cost than the control
group.
Measurement
The firms ranked Information
Week 500 at least twice from
2001 to 2004
ROA, ROS, OI/A, OI/S, OI/E,
COG/S, SGA/S, OPEXP/S
from 2001 to 2004
ROA, ROS, OI/A, OI/S, OI/E,
COG/S, SGA/S, OPEXP/S
from 2005 to 2007
Sources
Bharadwaj (2000);
Rai et al. (1997)
Bharadwaj (2000);
Porter (1985)
Bharadwaj (2000);
Santhanam and
Hartono (2003)
general administrative expenses to sales (SGA/S). As used by

Bharadwaj, operating expenses are defined as the sum of
COG and SGA.
these pairs. Using the Wilcoxon signed-rank test is effective

in removing the variance in performance influenced by the
difference in industry.
The financial data was obtained from the Compustat database.

This data was used to examine whether IT leaders show
higher profit and lower cost than control companies during the
same period between 2001 and 2004.
Like Santhanam and Hartonos study, we used the same

regression analysis procedures to test hypotheses 5, 6, 7, and
8. Two separate regression analyses were conducted for each
financial performance measure. The first analysis is about
how prior performance influences the current years performance, so a regression analysis regressing prior years performance on current performance was conducted. In the second
analysis, a binary variable was added to distinguish IT leaders
from control firms (1 for IT leaders, and 0 for the control
group). Two models can be described as
Sustainability of superior business performance is measured

by whether higher profit and lower cost are maintained over
time. To measure sustainability, we analyzed the profit and
cost ratios of both IT leaders and control firms over the period
from 2005 to 2007. Table 4 summarizes the constructs and
their measurement in this research.
FPt = 0 + 1FP(t-1)
Statistical Tests
This study examines whether firms with higher IT capability
tend to show superior financial performance in comparison to
the matching control firms. One way to test the hypotheses is
to compare the mean value of variables for the lT leader group
and the control sample using a standard t-test. However,
since the sample is not normally distributed, a non-parametric
test, the Wilcoxon signed-rank test, was used. It categorizes
one IT leader company and the corresponding control company into one pair, and it measures the differences between
FPt = 0 + 1FP(t-1) + 2D
where FP means financial performance, t indicates the time
period, D denotes the (0,1) binary variable, 1, 1, and 2 are
regression coefficient, and 0 and 0 represent the intercepts.
It is the significance of the coefficient (2) of the dummy variable in the second model that determines whether the IT
capability has a significant impact on business performance
after adjusting the effects of prior financial performance on
current performance.
311
Results
The results of the Wilcoxon signed-rank test from 2001 to
2007 are displayed in Table 5 and Table 6. Both the mean
and median of the performance measures are reported. The
test results are reported as P values.
The first hypothesis, that IT leaders are associated with higher
profit ratios, was not supported. While the IT leader group
didnt show any better performance in terms of profit ratios
including ROA, ROS, OI/A, and OI/E, they showed a lower
cost-of-goods-sold to sales (COG/S) than the control group in
three of the four years, so the second hypothesis was partially
supported. The third and fourth hypotheses test whether
superior business performance driven by IT capability sustains over time. Table 6 displays the result of the hypothesis
test. Contrary to our expectations, IT leaders did not show
any higher profit ratio or lower cost ratio than control firms
from 2005 to 2007, so neither hypothesis was supported.
Adjustment for Financial Halo Effect

(Hypotheses 58)
The regression analyses were conducted to understand the
effects of IT capability on business performance after adjusting for the prior years firm performance, and the results
of those analyses are reported in Table 7. Specifically,
changes in R-squares and the regression coefficients of
models in equations 1 and 2 are reported in the table. As we
expected, the prior years performance has a significant impact on the current years performance, and the results are
consistent with Santhanam and Hartonos. However, unlike
our expectation, the IT leader group was not associated with
higher profit ratios nor lower cost ratios. The significant
positive coefficient of the dummy variable for profit ratios
(ROA, ROS, OI/A, OI/S, OI/E) and significant negative
coefficient for cost ratios (COG/S, SGA/S, OPEXP/S) in the
second model means that IT capability is related to superior
business performance. As displayed in Table 7, however,
only one coefficient of the dummy variable was significant at
the 10 percent level, and it was ROS in 2005 with a negative
coefficient. That is, none of the four hypotheses were supported. This result is noteworthy given that the regression
analysis is considered to be more rigorous and conservative
than pair-wise comparison using the Wilcoxon signed-rank
test (Santhanam and Hartono 2003). Although the results are
surprising, a similar pattern was found in Santhanam and
Hartonos study. As we mentioned earlier, they also found
that the significant effect of IT capability on business performance shown in the pair-wise comparison test became less
obvious when measured with regression analysis.
312
Table 8 summarizes the results of the hypotheses tests. None

of the hypotheses were supported, with the exception of H2,
which was only partially supported.
Discussion
This study attempts to answer an important question: Does
the relationship between IT capability and business performance still hold true after the decade of rapid and persistent
changes in IT, such as wide adoption of Web technologies
and enterprise applications? Bharadwaj and Santhanam and
Hartono found a positive link between IT capability and
organizational performance. However, these studies were
conducted with data from the early 1990s, so we need to update our understanding. Therefore, we replicate, extend, and
update the two previous studies with data from the 2000s to
see how the benefits of being an IT leader have changed since
the early 1990s. This approach is meaningful in that replications and updates are generally underutilized by IS
researchers notwithstanding an important element of scientific
research (Berthon et al. 2002).
By comparing the business performance of IT leaders from
2001 to 2007 with that of control companies, we attempted to
confirm or dispute the presence of the link between IT capability and business performance. Unlike our predictions, we
didnt find that IT leaders were associated with higher profit
ratios or low cost ratios regardless of whether that was examined by the pair-wise comparison test, regression analysis, or
industry-benchmark test.3 Also, we didnt find the evidence
for the sustainability of IT capability from our analysis. To
measure sustainability, we analyzed the profit and cost ratios
of both IT leaders and control firms over the period from 2005
to 2007, but we didnt find any significant effect of IT
capability on business performance spanning the period.
In order to alleviate a concern to use a single control (benchmark) firm

instead of all other firms in the industry, we conducted a post hoc analysis
using multiple firm benchmarks like Santhanam and Hartonos study. As we
explained earlier, considering all firms in the industry as a benchmark for
comparison can be problematic because IT leaders tend to be much larger
than many other firms in the industry. Therefore, in the post hoc analysis, we
only used the firms that have comparable size (i.e., all the firms whose average annual sales are within 70% and 130% of the IT leaders) as the benchmark. Like the prior analyses, for each of the eight performance measures,
the difference between the performance of the leader firm and the average
performance of all the firms in the same four-digit SIC code and comparable
firm size was computed and analyzed using the Wilcoxon signed-rank test
and regression. To minimize the impact of industry differences which may
lead to biased results, we only used a control sample that consists of all the
firms with the corresponding four-digit SIC code, not two-digit. In all cases,
the results shown in Appendix B were not materially different from those
shown in Tables 6 and 7, which reinforces our findings.
Table 5. Results of Hypotheses Tests
Measurement
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
Category
IT Leaders
Control
2001
2002
2003
2004
Z
P
Mean Median Value Value
Z
P
Z
P
Z
P
0.004
0.023
-0.004
0.020
IT Leaders
0.013
0.031
Control
0.005
0.033
IT Leaders
0.064
0.062
Control
0.063
0.060
IT Leaders
0.097
0.074
Control
0.103
0.077
IT Leaders
Control
40.041 17.750
343.334 16.940
IT Leaders
0.665
0.696
Control
0.684
0.709
IT Leaders
0.224
0.204
Control
0.211
0.200
IT Leaders
0.842
0.878
Control
0.836
0.869
0.383 0.351
-0.219 0.587
0.938 0.174
-0.480 0.684
0.223 0.412
-1.868 0.031**
0.803 0.789
0.869 0.807
0.013
0.027
0.016
0.025
0.015
0.035
0.006
0.036
0.068
0.066
0.069
0.067
0.109
0.081
0.112
0.088
79.945 19.074
266.117 19.848
0.660
0.690
0.673
0.707
0.238
0.213
0.222
0.206
0.836
0.875
0.830
0.867
1.122 0.131
0.747 0.228
0.454 0.325
-0.483 0.686
-0.471 0.681
-1.542 0.062*
0.850 0.802
0.755 0.775
0.071
0.028
0.033
0.024
0.075
0.045
0.047
0.042
0.071
0.067
0.070
0.068
0.121
0.083
0.119
0.091
88.165 21.068
282.556 20.593
0.648
0.694
0.658
0.708
0.231
0.214
0.223
0.204
0.829
0.872
0.820
0.865
0.976 0.165
0.592 0.277
0.074 0.471
-0.592 0.723
-0.452 0.674
-1.365 0.086*
0.536 0.704
0.769 0.779
0.036
0.040
0.036
0.036
0.053
0.052
0.055
0.053
0.081
0.075
0.079
0.071
0.130
0.097
0.129
0.100
93.083 28.300
280.917 26.808
0.648
0.694
0.658
0.708
0.224
0.200
0.214
0.190
0.824
0.861
0.817
0.860
1.497 0.067 *
0.450 0.326
0.048 0.481
-0.870 0.808
-0.620 0.732
-1.020 0.154
0.508 0.694
1.302 0.904
ROA: return on assets; ROS: return on sales; OI/A: operating income to assets; OI/S: operating income to sales; OI/E: operating income to employees; OPEXP/S:
operating expense to sales; COG/S: cost of goods sold to sales; SGA/S: selling and general administration expense to sales
***
1% level; **5% level; *10% level
Table 6. Results of Test of Performance Sustainability

2005
Measurement
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
Category
Mean
Median
IT Leaders
0.040
0.041
Control
0.043
0.041
IT Leaders
0.060
0.060
Control
0.074
0.065
IT Leaders
0.083
0.079
Control
0.083
0.074
IT Leaders
0.130
0.109
Control
0.133
0.110
IT Leaders
102.454
30.370
Control
351.667
29.564
IT Leaders
0.654
0.688
Control
0.657
0.701
IT Leaders
0.219
0.201
Control
0.211
0.184
IT Leaders
0.826
0.857
Control
0.817
0.854
2006
Z Value
P Value
0.327
0.372
-1.267
0.897
0.1377
0.445
-0.800
0.788
-0.336
0.631
-0.429
0.334
0.384
0.650
1.203
0.886
Mean
Median
0.050
0.046
0.048
0.044
0.081
0.062
0.072
0.062
0.223
0.078
0.088
0.076
0.134
0.099
0.140
0.109
110.033
33.980
615.281
30.834
0.653
0.694
0.654
0.706
0.217
0.197
0.205
0.174
0.821
0.858
0.812
0.854
2007
Z Value
P Value
0.483
0.315
-0.698
0.757
-0.293
0.615
-1.747
0.958
-1.470
0.929
-0.184
0.427
0.789
0.785
1.718
0.957
Mean
Median
0.041
0.046
0.038
0.041
0.068
0.057
0.055
0.064
0.503
0.079
0.352
0.074
0.129
0.103
0.126
0.102
116.699
36.080
786.002
33.092
0.656
0.684
0.664
0.707
0.217
0.192
0.208
0.183
0.825
0.854
0.823
0.857
Z Value
P Value
0.434
0.332
-0.347
0.636
0.017
0.493
-0.494
0.689
0.416
0.339
-0.694
0.244
0.212
0.584
0.762
0.777
313
Table 7. Regression Analysis
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
314
Model
1
2
1
2
1
2
1
2
1
2
1
2
1
2
1
2
N
572
Model
1
2
1
2
1
2
1
2
1
2
1
2
1
2
1
2
N
556
Model
1
2
1
2
1
2
1
2
1
2
1
2
1
2
1
2
572
572
572
524
572
378
572
554
554
554
524
554
370
556
N
530
526
528
554
504
526
368
528
2002
R-Square Change
0.159
0.000
0.227
0.000
0.689
0.000
0.804
0.000
0.995
0.000
0.893
0.000
0.940
0.000
0.836
0.000
2003
R-Square Change
0.000
0.002
0.026
0.001
0.708
0.000
0.791
0.000
1.000
0.000
0.890
0.000
0.932
0.000
0.790
0.000
2004
R-Square Change
0.002
0.000
0.010
0.000
0.637
0.000
0.791
0.000
0.998
0.000
0.931
0.000
0.965
0.000
0.920
0.000
2001 Financial Performance

0.463***
0.463***
0.556***
0.556***
0.739***
0.739***
0.846***
0.846***
0.708***
0.707***
0.940***
0.940***
0.988***
0.988***
0.859***
0.859***
Dummy
0.394
0.005
0.001
0.003
-12.249
0.002
-0.004
-0.001

-0.011
-0.013
0.308***
0.306***
0.770***
0.771***
0.875***
0.875***
1.025***
1.025***
0.974***
0.975***
0.956***
0.958***
0.935***
0.935***
Dummy

-0.007
-0.007
0.029**
0.030**
0.764***
0.764***
0.875***
0.875***
0.928***
0.928***
0.962***
0.962***
0.972***
0.972***
0.949***
0.949***
Dummy
3.818
0.024
0.003
0.006
1.822
0.005
-0.007
0.002
0.149
-0.004
0.000
0.006
1.686
0.001
-0.001
0.004
Table 7. Regression Analysis (Continued)
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
Model
1
2
1
2
1
2
1
2
1
2
1
2
1
2
1
2
N
484
482
484
482
462
482
346
482
Model
438
2
1
2
1
2
1
2
1
2
1
2
1
2
1
2
Model
1
2
1
2
1
2
1
2
1
2
1
2
1
2
1
2
438
438
438
420
436
320
438
N
394
396
394
396
374
394
290
396
2005
R-Square Change
0.263
0.001
0.146
0.005
0.782
0.000
0.914
0.000
0.997
0.000
0.959
0.000
0.958
0.000
0.941
0.000
2006
R-Square Change
0.125
0.001
0.025
0.002
0.000
0.002
0.895
0.000
0.989
0.000
0.956
0.000
0.972
0.000
0.875
0.000
2007
R-Square Change
0.088
0.000
0.377
0.000
0.999
0.000
0.796
0.001
1.000
0.000
0.898
0.000
0.962
0.000
0.840
0.000

0.544***
0.545***
0.389***
0.388***
0.964***
0.964***
0.971***
0.971***
1.208***
1.208***
0.970***
0.970***
0.967***
0.967***
0.990***
0.990***
Dummy
-0.429
-0.017*
-0.002
-0.004
-13.628
0.003
0.001
0.001
Dummy
0.348***
0.348***
0.186***
0.190***
0.394
0.396
0.945***
0.945***
1.725***
1.725***
0.949***
0.949***
0.999***
0.999***
0.952***
0.953***
0.344***
0.344***
0.682***
0.682***
1.151***
1.151***
0.891***
0.891***
1.210***
1.210***
0.963***
0.963***
0.971***
0.972***
0.931***
0.931***
0.420
0.012
0.134
-0.002
-12.349
0.000
0.003
-0.001
Dummy
0.167
0.007
0.007
0.007
5.363
-0.004
-0.005
-0.007
Model 1: Performance measure for year t = f(Performance measure for year t-1)
Model 2: Performance measure for year t = f(Performance measure for year t-1, dummy: 1 = IT leaders, 0 = control firms )
***1% level; **5% level; *10% level
315
Table 8. Summary of Hypotheses Tests

Hypotheses
Results
H1: The average profit ratios of firms that have superior IT capability in the 2000s are higher than the average
profit ratios of all control firms.
H2: The average cost ratios of firms that have superior IT capability in the 2000s are lower than the average cost
Not supported
Partially supported
profit ratios of all control firms in subsequent years.
Not supported
Not supported
profit ratios of all control firms after adjusting for prior financial performance.
Not supported
ratios of all control firms after adjusting for prior financial performance.
Not supported
H7: After adjusting for prior financial performance, the average profit ratios of firms that have superior IT capability
in the 2000s are higher than the average profit ratios of all control firms in subsequent years.
Not supported
H8: After adjusting for prior financial performance, the average cost ratios of firms that have superior IT capability
in the 2000s are lower than the average cost ratios of all control firms in subsequent years.
Not supported
Although our findings clearly contradict the findings of the

previous studies that link the performance of a firm to its IT
capability, it is premature to declare the demise of such a link.
While more research is required to understand the cause and
meaning of the change in the findings between our study and
the earlier studies, we offer two possible rationales: (1) the
role and value of IT has changed over the period of time,
making IT a weaker predictor for business performance, and
(2) the method of selecting firms with superior IT capability
used in the studies (i.e., IW 500) is flawed.
Comparison of Performance Between

the Two Groups from 1991 to 2007
First, to understand how the value of being an IT leader has
changed over time, we collected and analyzed financial data
for the entire period from 1991 to 2007. For each of the eight
financial criteria, we calculated and charted the median values
for the IT leader group and the control group. Figures 2 to 9
show that there is a notable convergence of the two groups in
almost all criteria. See Appendices C and D for full data and
the method.
One of the most notable observations from these charts is that
the performance between the two groups converged around
the year 2001. While both groups suffered in all incomerelated criteria during this recession period caused by the dotcom bubble bust, the decline was more pronounced for the IT
leader group. Since then, both groups have gradually
recovered, but the IT leader group has not regained its prior
superiority over the control group.
316
Another notable observation is that most cost-related indices

were in decline, indicating improved operational efficiency
for both groups. In general, there is no distinct pattern between the two groups with one exception. Since 2001, the IT
leader group has shown a constantly lower cost-of-goods-sold
to sales (COG/S) ratio than the same ratio in the control
group. On the other hand, the IT leader group has shown consistently higher selling-and-general-administrative-costs to
sales (SGA/S) over the entire period except in 2000.
Another sign that all firms in the 2000s have become more
efficient is the downward trend in the SGA/S chart (Figure 8).
SGA/S expenses are the generally accepted accounting measures for the overhead costs of a firm (Bharadwaj 2000). All
other things being equal, lower SGA/S means firms generate
sales with lower overhead costs, and firms cant achieve
lower SGA/S without an associated increase in efficiency.
The decreasing performance gap in these charts appears to
confirm the findings of our study. Assuming that these
findings accurately represent the changes that took place
regarding the role of IT, we naturally ask the next question:
What happened and why?
Since the early 1990s, IT has undergone dramatic transformation and the value of having superior IT capability may no
longer directly translate into superior business performance.
The advent of the Internet, prevalent outsourcing, particularly
offshore outsourcing, and increasing adoption of ERP packages, along with the decreasing cost of computing, are some
of the developments that have made IT more readily available
and homogeneous.
Figure 2. Return on Assets (ROA)
Figure 3. Return on Sales (ROS)
317
Figure 4. Operating Income to Assets (OI/A)
Figure 5. Operating Income to Sales (OI/S)
318
Figure 6. Operating Income to Employee (OI/E)
Figure 7. Cost of Goods Sold to Sales (COG/S)
319
Figure 8. Selling and General Administrative Expenses to Sales (SGA/S)
Figure 9. Median Values of Operating Expenses to Sales (OPEXP/S)
320
Since the Bharadwaj and the Santhanam and Hartono studies

were conducted, IT has become more affordabletechnically
and economicallyand universally available. Some even
argue that IT has now become a commodity that any company
can simply pay to acquire. Consistent with such a view is the
claim that the competitive advantage offered by superior IT
was eroded by the universalization or commoditization of IT
(Masli et al. 2011).
IT systems were proprietary and expensive and required substantial resources to develop and implement in prior decades.
Since then, IT has gone through a constant standardization
and homogenization process, resulting in affordable but
uniform IT products. As more companies replace customized
applications with generic ones, the homogenization of IT
capabilities has accelerated. The best example of this trend is
enterprise resource planning (ERP). Companies adopt ERP
systems because they incorporate the best practices of the
industry into their business processes. It is not hard to understand why ERP systems following the best practices would
not provide a competitive edge when everyone is following
the same practices (Wang 2010).
Many IT systems like ERPs previously required significant
capital and human resource investments and became a significant entry barrier for competitors. With these barriers
resulting from the lack of standards, high costs, physical limitations, and patents, companies could gain and sustain competitive advantages over competitors (Carr 2003). However, the
standardization and homogenization of IT systems, fueled by
the constantly declining cost of computing, have significantly
lowered the barrier of entry to those competitors who couldnt
afford advanced IT systems in the past (Bakos 1991).
Finally, in order for IT leaders to benefit from their superior
IT capability, the competitors response is also important.
Although IT has become increasingly standardized and affordable, if competitors do not adopt the systems or slowly
respond to these IT innovations, IT leaders can maintain a
competitive advantages from their superior IT capability.
However, with the buzz about Y2K, the new economy, or the
Internet revolution, the CEOs or the boards of directors in
competing companies are more likely to have an awareness of
the importance of IT (Liang et al. 2007; Tallon and Kraemer
2007;Teo et al. 2003; Wang 2010). The high profile dot-com
bubble had all companies rush to invest in IT and to build IT
capability. Since IT is important for survival, every firm must
put forth huge effort to remain competitive. However, when
every company is equipped with nearly similar IT capability,
superior IT capability no longer offers a clearly discernible
competitive advantage. As the availability increased and their
cost decreased, IT became a ubiquitous and competitive necessity (Clemons and Row 1991; Hitt and Brynjolfsson 1996).
Use of IW 500 for Selecting IT Leaders

Another potential issue exists that could explain the conflicting results. What if the IW 500 list used as a proxy for
measuring IT capability does not accurately represent the IT
capability of a firm? Bharadwaj explained that using a
popular ranking such as IW 500 offers many advantages in
terms of a high response rate or the quality of the respondents.
However, the ranking presents a challenge for researchers
who look for benchmarking criteria because of the inevitable
and frequent changes in selection processes. In fact, since the
first publication of the IW 500 list in 1989, the selection
criteria for inclusion in the IW 500 have constantly changed,
and the process is neither reliable nor consistent, as shown in
Table 9. For example, the IW 500 firms from the early 1990s
were selected solely based on IT department sizes.4 However,
to be selected for IW 500 in the 2000s, companies had to
submit quantitative data such as IT budgets as well as an
essay that describes how innovatively they use IT. Once the
surveys were evaluated, weighted, and combined to a composite score, IW editors ranked the companies based on each
composite score.5 We suspect that the changed selection criteria in IW 500 from the 1990s to the 2000s could have contributed to the contradictory outcome of the study. Determining the validity of the use of the IW 500 list to identify IT
leaders is beyond the scope of this study but remains as a
critical question worthy of further investigation. Furthermore,
alternative methods to assess overall IT capability that are
more stable over a long period of time is another worthy area
for future research.
Limitations and Future Research

With the unexpected findings that contradict the findings of
the earlier studies and the commonly accepted view that IT
capability has a significant bearing on a firms performance,
we took every effort to ensure that the study was not unduly
affected by logical and methodological flaws. We examined
this issue in the current study as well as the previous studies
used as our benchmark. Nevertheless, the findings of the
study should be interpreted with care because there are still
Information Week, September 16,1991, p. 6; September 21, 1992, p. 154;

September 27, 1993, p. 25; October 10, 1994, p. 30
Information Week, September 17, 2001 (available at http://www.

informationweek.com/story/IWK20010916S0010); September 23, 2002
(available at http://www.informationweek.com/news/6503397); September
22, 2003 (available at http://www.informationweek.com/news/ 15000096);
September 20, 2004 (available at http://www.informationweek.com/news/
47900180).
321
Table 9. IW 500 Selection Criteria from 1991 to 2004

Year
IW 500 Selection Criteria and Data Source
Evaluation
1991
U.S.-based publicly traded companies according to the value of their

installed base of IT
Ranked by criteria developed by

Georgia State University.
1992
U.S.-based publicly traded companies according to the value of their

installed base of IT
IW asked IW 500 firms
1993
U.S.-based publicly traded companies based on revenue
IW mailed a survey to IW 500
1994
U.S.-based publicly traded companies based on revenue
IW editors, industry and IT executives,

researchers, and practitioners cited IT
leaders in IW 500
1995
Biggest and best users of IT from two surveys about how IT improve
company productivity
IW editors and a group of MIT

researchers
1996
Biggest users of IT from a survey about company's number of users and

the types of products used
Computer Intelligence, a research firm

in La Jolla, CA
1997
Biggest users of IT from a survey about amount, type, and use of

hardware, software, networks, and telecom equipment and services
Computer Intelligence, a research firm

in La Jolla, CA
1998
Most innovative corporate users of IT with at least $1 billion in annual

revenue from a survey about early adoption and creative use of
technologies such as knowledge management, electronic commerce,
ERP, and homegrown applications
IW editors
1999
Largest and most innovative IT users from a survey about early adoption
and creative use of technologies such as application development, Ebusiness, CRM, and BP/ERP
IW editors
2000
Largest and most innovative IT users with at least $1 billion in annual

revenue from a survey about early adoption and creative use of
technologies such as technology strategy, electronic business strategy,
general business practices, and customer knowledge
IW editors
2001
Largest and most innovative IT organizations based in the U.S. with at

least $1 billion in annual revenue that demonstrated a pattern of
technological, procedural, and organizational innovation
IW editors
2002
Largest and most innovative users of IT with at least $ 1 billion in annual

revenue based on examination of core areas of operations, including
technology deployment, IT budget, technology strategies, E-business
and customer-knowledge initiatives, and staff management
IW editors
2003
Largest and most innovative IT organizations that demonstrated patterns

of technological, procedural, and organizational innovation
IW editors
2004
Largest and most innovative IT organizations based on management

priorities, technology strategies, staffing initiatives, and budget plans
IW editors
limitations and issues that need to be addressed by future

studies.
322
The validity of using the IW 500 directory in studies that

investigate the role and value of IT is worthy of future
research. Furthermore, alternative methods to identify
firms with superior IT capability that are more reliable
and robust should be developed.
A systematic and concerted effort to research the link

between IT capability and business performance over an
extended period of time is needed.
Future studies should identify and incorporate other valid

constructs and variables that potentially affect the relationship between IT capability and business performance.
In addition, it is worthy for replicating studies for groups
of organizations with different characteristics such as

size, industry, role of information in the organization,
etc., to better understand the potential advantage of IT
within different types of organizations.
Need for Reliable and Robust Methods

to Identify IT Leaders
This study, as well as the two previous studies used as the
benchmark, relies on the IW 500 list to identify IT leaders
with superior IT capability. Using this list offers several
benefits. Information Week 500 has a long history, publishing
a weekly magazine on IT and IT-related news and articles
since 1979. In addition, it also conducts and publishes the
findings of several studies, including the annual IW 500, the
National IT Salary Survey, and the Global Information
Security Study. With over 400,000 subscribers, Information
Week is one of the most respected and reliable sources of
information on IT, including the IW 500 listing. However,
using the IW 500 introduces some important limitations. The
first issue is that Information Week constantly changes the
criteria and procedure for selecting IT leaders, making
longitudinal studies based on the listing potentially less
reliable. In addition, the selection criteria and procedure are
not scientific and rigorous enough to provide consistent data
for research. The IW 500 reflects experts opinions, rather
than objective evaluations of a firms IT capability. Firms
that dont appear on the IW 500 were assumed to have
inferior IT capability, but it is possible that the list contains a
response bias and that many strong IT firms just didnt
respond to the survey. Finally, the firm selection results in a
binary measure with firms being identified as leaders or not
leaders. Such a measurement approach does not allow
evaluation of the impact of incremental improvements in IT
capability on firm performance (Santanam and Hartnono
2003). While the IW 500 provides a reasonable compromise
for research that needs to identify IT leaders, the IT research
community needs more rigorous and universal methods to
identify IT leaders (Santhanam and Hartono 2003; Stoel and
Muhanna 2009). Such methods will allow the research
community to build and accumulate knowledge in more
systematic ways and provide a more solid foundation for IS
research as a unique discipline.
Need for Systematic and Concerted

Effort for Longitudinal Studies
A longitudinal study is desired to examine the sustained
impact of IT capability on business performance (Santhanam
and Hartono 2003). To examine the sustained effects of IT
capability, it would be interesting to study whether Bharadwajs IT leaders continue to maintain IT leadership in the
2000s, as well as to examine whether they perform better than
the control groups in the 2000s using recent data. In fact, the
IT leaders in her study were selected from 1991 to 1994 in the
IW 500, so it is questionable whether the IT leaders in the
1990s have maintained their advantages in the 2000s when IT
became more available.
Future Research
In the current study we did not find any discernable evidence
for the relationship between IT capability and business performance. This does not necessarily imply that such a relationship no longer exists. Our research opened a Pandoras box
full of questions worthy of addressing with future research,
including
Does IT leadership still relate to enhanced business

performance?
What could have affected the study resulting in findings

that contradicted earlier studies?
What other factors that were not investigated in the

studies should be explored to further our understanding
of the role and value of IT?
One possible and desirable approach to expanding our

knowledge on the role and value of IT is tapping into theories
such as the resource based view (RBV) and the dynamic
capabilities perspectives (DCP).
According to RBV, IT resources can improve business performance, but only when they are accompanied by other
resources such as (1) effective organizational structure,
(2) productive culture, and (3) sufficient skills to leverage IT
assets for business needs (Acemoglu et al. 2007; Bartel et al.
2007; Barua and Mukhopadhyay 2000; Mathis et al. 2011;
Melville et al. 2004; Nevo and Wade 2010; Wade and
Hulland 2004). Future research should factor in these additional resources to better understand the relationship between
IT capability and business performance. We speculate that IT
leaders have flatter and slimmer organizational structures than
the control groups because superior IT capability allows for
a reduction in bureaucracy and less middle managers (Brynjolfsson and Hitt 2000). This mandates an increased effort for
interdisciplinary research with organizational theorists to
understand the impact of IT capability on organizational
structure.
323
In line with organizational structure, IS researchers may ask

how IT capability impacts organizational culture. Do IT
leader companies have different cultures than the control
group? Does the high digitization of IT leaders influence the
formation of a different culture?
Superior IT capability should accompany IT investment and
skilled workforce leverage (Bresnahan et al. 2002). Do IT
leader companies have better IT personnel than other companies? What are the characteristics of IT people in the firms
with superior IT capability? We believe that IT personnel in
IT leader companies are probably more entrepreneurial
because they should have better ideas for the innovative use
of IT in business to take advantage of IT assets. Entrepreneurs are distinguished in terms of exploiting the opportunities that new products or services provide. Innovative IT
personnel may have a common ground with entrepreneurs. In
summary, by examining the differences between IT leaders
and control groups on the basis of organizational structure,
culture, and IT personnel, IS researchers can potentially
identify the general patterns that make firms IT superior.
The dynamic capabilities perspectives (DCP) is another
theory that allows identifying variables that explain the
relationship between IT capability and firm performance.
DCP proposes that IT influences firm performance through
organizational capabilities (agility, digital options, and entrepreneurial alertness) and strategic processes (capability
building, entrepreneurial action, and coevolutionary adaptation) (Sambamurthy et al. 2003). These dynamic capabilities
and strategic processes impact the ability of firms to initiate
competitive actions, and these competitive actions are a predecessor of superior business performance. Examples of a
firms dynamic capabilities include rapid new product
development, alliancing, and strategic decision making. Since
IT is essential in collecting, storing, and diffusing information, the firms superior IT capability may be related to the
increase in the number of new products, innovations, or
patents (Pavlou and El Sawy 2006; Xue et al. 2012). It is
worthy of future research to examine whether the IT leaders
generate more patents, innovations, or blockbuster new
products than the control companies.
Conclusion
This study attempts to answer an important question: Does
the relationship between IT capability and business performance still hold true after the decade of rapid and persistent
changes in IT, such as wide adoption of Web technologies
and enterprise applications? By comparing the business per-
324
formance of IT leaders from 2001 to 2007 with that of control

companies, we attempted to confirm or dispute the presence
of the link between IT capability and business performance.
Our evidence indicates that such a link no longer exists. In an
effort to understand the cause and meaning of the conflicting
outcome, we carried out several subsequent investigations and
analyses as reported in this paper. While these follow-up
efforts provided some clues and support the value of this
investigations contribution to research, they presented
numerous questions that are worthy of future research.
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About the Authors

Ho-Chang Chae is an assistant professor in the Finance,
Accounting, and Information Systems Department at the Gary E.
West College of Business at West Liberty University. His research
interests include IT business value, IT innovations, and IT entrepreneurship. Prior to returning to academia, he cofounded Infinity
Teleradiology, a start-up company that provides hospitals and
imaging centers with teleradiology services and digital radiology
solutions, and worked as chief information officer. He received his
Ph.D. in Business Computer Information Systems from the
University of North Texas.
Chang E. Koh is an associate professor in the Information
Technology and Decision Sciences Department at the University of
North Texas. He also serves as managing director for the Center for
Decision and Information Technologies at the university. His major
research interests include IT and business performance, crosscultural comparison of IT practices and mobile computing and data
services. His research articles have appeared in such journals as
326
MIS Quarterly, Information & Management, Industrial Marketing

Management, and International Journal of Electronic Commerce,
among others. He holds a Ph.D. in Information System from the
University of Georgia.
Victor R. Prybutok is a Regents Professor of Decision Sciences
in the Information Technology and Decision Sciences Department
and Associate Dean of the Toulouse Graduate School at the
University of North Texas. He received, from Drexel University, his
B.S. with High Honors in 1974, a M.S. in Bio-Mathematics in 1976,
a M.S. in Environmental Health in 1980, and a Ph.D. in
Environmental Analysis and Applied Statistics in 1984. He is also
an American Society for Quality certified quality engineer, certified
quality auditor, certified manager of quality/organizational excellence, and an accredited professional statistician (PSTAT) by the
American Statistical Association. The over 130 journal articles,
several book chapters, and more than 120 conference presentations
he authored address the areas of information systems measurement,
quality control, risk assessment, and applied statistics.
RESEARCH NOTE
INFORMATION TECHNOLOGY CAPABILITY AND FIRM

PERFORMANCE: CONTRADICTORY FINDINGS AND
THEIR POSSIBLE CAUSES
Ho-Chang Chae
Department of Finance, Accounting, and Information Systems, Gary E. West College of Business, West Liberty University,
West Liberty, WV 26074 U.S.A. {ho-chang.chae@westliberty.edu}
Chang E. Koh and Victor R. Prybutok

Department of Information Technology and Decision Sciences, College of Business, University of North Texas,
Denton, TX 76203-5017 U.S.A. {Chang.Koh@unt.edu} {prybutok@unt.edu}
Appendix A
List of IT Leaders and Control Companies
IT Leader Sample
Consol Energy Inc
Halliburton Co
Standard Pacific Corp
Beazer Homes USA Inc
Toll Brothers Inc
D R Horton Inc
Lennar Corp
Granite Construction Inc
Fluor Corp
Gold Kist Inc
Kraft Foods Inc
Smithfield Foods Inc
Campbell Soup Co
General Mills Inc
Imperial Sugar Co
Hershey Co
Molson Coors Brewing Co
Constellation Brands - Cl A
Brown-Forman - Cl B
SIC Code
1220
1389
1531
1531
1531
1531
1531
1600
1600
2015
2000
2011
2030
2040
2060
2060
2082
2084
2085
Control Sample
Walter Energy Inc
Schlumberger Ltd
M/I Homes Inc
Hovnanian Entrprs Inc -Cl A
MDC Holdings Inc
Ryland Group Inc
KB Home
Empresas Ica Soc Ctl - ADR
Alstom - ADR
Sadia Sa - ADR
ConAgra Foods Inc
Hormel Foods Corp
Heinz (H J) Co
Kellogg Co
Wrigley (Wm) Jr Co
Tate & Lyle Plc - ADR
Comp Bebidas Americas - ADR
Gruma S.A.B. de C.V. - ADR B
Coca Cola Hellenic Bttlg - ADR
SIC Code
1220
1389
1531
1531
1531
1531
1531
1600
1600
2015
2000
2011
2030
2040
2060
2060
2082
2040
2086
MIS Quarterly Vol. 38 No. 1Appendices/March 2014
A1
IT Leader Sample
McCormick & Company Inc
Unifi Inc
Cintas Corp
Kellwood Co
WestPoint Stevens Inc
Universal Forest Prods Inc
Clayton Homes Inc
Louisiana-Pacific Corp
Johnson Controls Inc
Georgia-Pacific Corp
Steelcase Inc
Stora Enso Corp - ADR
MeadWestvaco Corp
Sonoco Products Co
Sealed Air Corp
Rayonier Inc
Smurfit-Stone Container Corp
Gannett Co
Dow Jones & Co Inc
Banta Corp
Bowne & Co Inc
Donnelley (R R) & Sons Co
Standard Register Co
New York Times Co - Cl A
FMC Corp
Bayer Ag - ADR
Millennium Chemicals Inc
Air Products & Chemicals Inc
PolyOne Corp
Eastman Chemical Co
Lilly (Eli) & Co
Abbott Laboratories
Wyeth
Johnson & Johnson
Dade Behring Holdings Inc
Sigma-Aldrich Corp
Avon Products
Colgate-Palmolive Co
Dow Chemical
Du Pont (E I) De Nemours
Baxter International Inc
PPG Industries Inc
Sherwin-Williams Co
Engelhard Corp
Praxair Inc
Dial Corporation
Tesoro Corp
A2
SIC Code
2090
2200
2320
2330
2390
2421
2451
2400
2531
2600
2522
2621
2631
2650
2670
2611
2631
2711
2711
2750
2750
2750
2761
2711
2800
2800
2810
2810
2821
2821
2834
2834
2834
2834
2835
2836
2844
2844
2821
2820
2836
2851
2851
2810
2810
2840
2911
Control Sample
Pepsiamericas Inc
Burlington Industries Inc
Polo Ralph Lauren Cp - Cl A
Benetton Group Spa - ADR
Warnaco Group Inc
Potlatch Corp
Oakwood Homes Corp
Champion Enterprises Inc
Lear Corp
Intl Paper Co
Intier Automotive Inc
Upm-Kymmene Corp - ADR
Temple-Inland Inc
Packaging Corp Of America
Bemis Co Inc
Graphic Packaging Holding Co
Amcor Ltd - ADR
Tribune Co
Washington Post - Cl B
Cenveo Inc
ACG Holdings Inc
World Color Press Inc
Scholastic Corp
Wolters Kluwer NV - ADR
Ciba Holding AG - ADR
BASF Se - ADR
Grace (W R) & Co
BOC Group Plc - ADR
Schulman (A.) Inc
Huntsman Intl Llc
Warner-Lambert Co
Astrazeneca Plc - ADR
Aventis Sa - ADR
Novartis Ag - ADR
Applied Biosystems Inc
Merck Serono Sa - ADR
Lauder (Estee) Cos Inc - Cl A
Alliance Boots Plc - ADR
Bristol-Myers Squibb Co
Merck & Co
Rhodia - ADR
Air Liquide Sa - ADR
Celanese Ag
Arco Chemical Co
Syngenta Ag - ADR
Amersham Plc - ADR
Pennzoil-Quaker State Co
SIC Code
2086
2200
2320
2330
2300
2421
2451
2451
2531
2600
2531
2621
2631
2650
2670
2631
2600
2711
2711
2750
2750
2750
2731
2732
2800
2800
2810
2810
2821
2821
2834
2834
2834
2834
2835
2836
2844
2844
2834
2834
2800
2810
2860
2860
2870
2835
2911
IT Leader Sample
Lubrizol Corp
Cooper Tire & Rubber Co
Armstrong Holdings Inc
Pactiv Corp
Goodyear Tire & Rubber Co
Lafarge North America Inc
Owens Corning
Weirton Steel Corp
Ispat Inland Inc
Allegheny Technologies Inc
Harsco Corp
Worthington Industries
APW Ltd
Tower Automotive Inc
Snap-On Inc
Varco International Inc
National Oilwell Varco Inc
Gateway Inc
Applied Materials Inc
Maxtor Corp
Xerox Corp
Tecumseh Products Co - Cl A
Flowserve Corp
Storage Technology Cp
Timken Co
AGCO Corp
Western Digital Corp
Quantum Corp
3Com Corp
Black & Decker Corp
EMC Corp/Ma
NCR Corp
Illinois Tool Works
Cisco Systems Inc
Deere & Co
Dell Inc
American Power Conversion Cp
Acuity Brands Inc
Sanmina-Sci Corp
Fairchild Semiconductor Intl
Kimball International - Cl B
Analog Devices
Conexant Systems Inc
ADC Telecommunications Inc
LSI Corp
Imation Corp
SPX Corp
SIC Code
2990
3011
3089
3089
3011
3270
3290
3312
3312
3312
3390
3310
3460
3460
3420
3533
3533
3571
3559
3572
3577
3585
3561
3572
3562
3523
3572
3572
3576
3540
3572
3578
3540
3576
3523
3571
3620
3640
3672
3674
3679
3674
3674
3661
3674
3695
3612
Control Sample
Suncor Energy Inc
Hanna (M A) Co
Jacuzzi Brands Inc
Reebok International Ltd
Nike Inc - Cl B
Fletcher Building Ltd
CEMEX S.A.B de C.V. - ADR
Rouge Industries Inc
Commercial Metals
AK Steel Holding Corp
Grupo Imsa SA de CV - Ads
Gerdau SA - ADR
Alliant Techsystems Inc
Silgan Holdings Inc
Crane Co
Grant Prideco Inc
Weatherford Intl Ltd
Apple Inc
Dover Corp
Iomega Corp
Canon Inc - ADR
Lennox International Inc
Pall Corp
Pentair Inc
Nacco Industries - Cl A
Metso Corp - ADR
Lexmark Intl Inc - Cl A
York International Corp
Baker Hughes Inc
SKF AB - ADR
Atlas Copco AB - ADR
CNH Global NV
Trane Inc
Komatsu Ltd - ADR
Sanyo Electric Co Ltd - ADR
Caterpillar Inc
Sgl Carbon Ag - ADR
Thomas & Betts Corp
Viasystems Inc
Adv Semiconductor Engr - ADR
Loral Space & Communications
Harman International Inds
AVX Corp
Jabil Circuit Inc
Amkor Technology Inc
Tellabs Inc
On Semiconductor Corp
SIC Code
2911
3080
3080
3021
3021
3270
3241
3312
3312
3312
3312
3312
3480
3411
3490
3533
3533
3571
3559
3572
3577
3585
3569
3561
3537
3530
3577
3585
3533
3562
3560
3523
3585
3531
3579
3531
3620
3640
3672
3674
3663
3651
3670
3672
3674
3661
3674
A3
IT Leader Sample
National Semiconductor Corp
Qualcomm Inc
Harris Corp
Micron Technology Inc
Cooper Industries Plc
Solectron Corp
Whirlpool Corp
Texas Instruments Inc
Nortel Networks Corp
Intel Corp
Emerson Electric Co
Paccar Inc
Daimler Ag
General Motors Corp
American Axle & Mfg Holdings
Eaton Corp
Textron Inc
GenCorp Inc
Harley-Davidson Inc
Fleetwood Enterprises Inc
ArvinMeritor Inc
Federal-Mogul Corp
Honeywell International Inc
Lockheed Martin Corp
Northrop Grumman Corp
Eastman Kodak Co
AMETEK Inc
Burlington Northern Santa Fe
Landstar System Inc
Iron Mountain Inc
Royal Caribbean Cruises Ltd
Alaska Airlines Inc
Continental Airls Inc - Cl B
Delta Air Lines Inc
American Airlines Inc
Con-Way Inc
Hub Group Inc - Cl A
Gatx Corp
Global Crossing Ltd
Alltel Corp
MCI Inc
Sprint Corp-Consolidated
Bellsouth Corp
AT&T Inc
Verizon Communications Inc
Cox Communications Inc
Cablevision Sys Corp - Cl A
A4
SIC Code
3674
3663
3663
3674
3640
3672
3630
3674
3661
3674
3600
3711
3711
3711
3714
3714
3721
3760
3751
3716
3714
3714
3728
3760
3812
3861
3823
4011
4213
4220
4400
4512
4512
4512
4512
4210
4731
4700
4813
4812
4813
4813
4813
4813
4813
4841
4841
Control Sample
Exide Technologies
Advanced Micro Devices
Maytag Corp
Agere Systems Inc
Corning Inc
Thomson - ADR
Marconi Corp Plc - ADR
ABB Ltd - ADR
Nokia Corp - ADR
Alcatel-Lucent - ADR
Electrolux Ab - ADR
Navistar International Corp
Toyota Motor Corp - ADR
Ford Motor Co
Autoliv Inc
Tomkins Plc - ADR
BAE Systems Plc - ADR
Metaldyne Corp
Embraer-Empresa Bras - ADR
Mcdermott Intl Inc
Goodrich Corp
Scania Aktiebolag - ADR
Visteon Corp
United Technologies Corp
Thales - ADR
Fujifilm Holdings Corp - ADR
Centerpulse Ltd - ADR
Canadian Pacific Railway Ltd
Arkansas Best Corp
Covenant Transportation Grp
Carnival Corp/Plc (Gbr) - ADR
China Southn Airls Ltd - ADR
Northwest Airlines Corp
Japan Airlines Corp - ADR
British Airways Plc - ADR
YRC Worldwide Inc
Expeditors Intl Wash Inc
Pacer International Inc
Compania Telecom Chile - Ads
Telefonica Moviles SA - ADR
Bce Inc
Telefonica SA - ADR
Telecom Italia Spa - Old
France Telecom - ADR
Deutsche Telekom AG - ADR
British Sky Brdcstg Gp - ADR
Charter Communications Inc
SIC Code
3690
3674
3630
3674
3679
3663
3661
3613
3663
3661
3630
3711
3711
3711
3714
3714
3721
3714
3721
3730
3728
3711
3714
3720
3812
3861
3842
4011
4213
4213
4400
4512
4512
4512
4512
4213
4731
4731
4813
4812
4813
4813
4813
4813
4813
4841
4841
IT Leader Sample
Great Plains Energy Inc
Pinnacle West Capital Corp
Ameren Corp
Progress Energy Inc
PacifiCorp
Exelon Corp
Mirant Corp
Florida Power & Light Co
Tennessee Valley Authority
Entergy Corp
Edison International
Southern Co
Peoples Energy Corp
Alliant Energy Corp
Xcel Energy Inc
CMS Energy Corp
Duke Energy Corp
EQT Corp
Waste Management Inc
Anixter Intl Inc
Watsco Inc
Handleman Co
Airgas Inc
United Stationers Inc
Owens & Minor Inc
Graybar Electric Co Inc
Grainger (W W) Inc
Arrow Electronics Inc
Ashland Inc
Cardinal Health Inc
Belk Inc
Saks Inc
Sears Roebuck & Co
Big Lots Inc
Smart & Final Inc
Supervalu Inc
Albertson's Inc
Kroger Co
Spartan Stores Inc
Pathmark Stores Inc
CSK Auto Corp
Advance Auto Parts Inc
Mens Wearhouse Inc
Burlington Coat Factory Wrhs
Footstar Inc
Pier 1 Imports Inc/De
Best Buy Co Inc
SIC Code
4911
4911
4911
4911
4911
4911
4911
4911
4911
4911
4911
4911
4924
4931
4931
4931
4931
4923
4953
5063
5070
5099
5084
5045
5047
5063
5000
5065
5160
5122
5311
5311
5311
5331
5411
5411
5411
5411
5411
5411
5531
5531
5600
5651
5661
5700
5731
Control Sample
Southwestern Public Svc Co
Connecticut Light & Power Co
British Energy Plc - ADR
Alabama Power Co
FirstEnergy Corp
Intl Power Plc - ADR
Cinergy Corp
Scottish Power Plc - ADR
Hydro Quebec
Southern California Edison
American Electric Power Co
Endesa SA - ADR
National Fuel Gas Co
Northern Indiana Pub Serv Co
Avista Corp
Public Service Elec & Gas Co
PG&E Corp
Hawaiian Electric Inds
Consolidated Edison Inc
Wesco Intl Inc
Emco Ltd
Amer Bldrs & Cntrctr Supply
Metals USA Inc
Danka Business Sys Plc - ADR
Ryerson Inc
Merisel Inc
IKON Office Solutions
Wolseley Plc - ADR
AmerisourceBergen Corp
Sysco Corp
Neiman-Marcus Group Inc
Kohl's Corp
Penney (J C) Co
Dollar General Corp
Marsh Supermarkets - Cl B
Delhaize Group Sa - ADR
Safeway Inc
Koninklijke Ahold Nv - ADR
Penn Traffic Co
Pao De Acucar Brasil - Gdr
TBC Corp
Pep Boys-Manny Moe & Jack
J Crew Group Inc
Ross Stores Inc
Retail Ventures Inc
Linens N Things Inc
Circuit City Stores Inc
SIC Code
4911
4911
4911
4911
4911
4911
4911
4911
4911
4911
4911
4911
4924
4931
4931
4931
4931
4911
4931
5063
5070
5030
5051
5040
5051
5045
5040
5070
5122
5140
5311
5311
5311
5331
5411
5411
5411
5411
5411
5411
5531
5531
5600
5651
5661
5700
5731
A5
IT Leader Sample
Cracker Barrel Old Ctry Stor
CVS Caremark Corp
Tiffany & Co
Lands End Inc
Petsmart Inc
CDW Corp
Office Depot Inc
Zions Bancorporation
Synovus Financial Corp
Northern Trust Corp
Regions Financial Corp
Fifth Third Bancorp
Providian Financial Corp
BB&T Corp
State Street Corp
Mellon Financial Corp
National City Corp
Keycorp
PNC Financial Svcs Group Inc
Wells Fargo & Co
Wachovia Corp
Bank One Corp
JPMorgan Chase & Co
Capital One Financial Corp
Countrywide Financial Corp
SLM Corp
Cit Group Inc
Fannie Mae
Goldman Sachs Group Inc
Morgan Stanley
UBS AG
Mony Group Inc
Torchmark Corp
Nationwide Finl Svcs - Cl A
Northwestern Mutual Life Ins
Prudential Financial Inc
American International Group
PacifiCare Health Systems
Cigna Corp
Aetna Inc
Ohio Casualty Corp
Transatlantic Holdings Inc
Cincinnati Financial Corp
American Family Ins Group
Progressive Corp-Ohio
Hartford Financial Services
Allstate Corp
A6
SIC Code
5812
5912
5944
5961
5990
5961
5940
6020
6020
6020
6020
6020
6020
6020
6020
6020
6020
6020
6020
6020
6020
6020
6020
6141
6162
6111
6172
6111
6211
6211
6282
6311
6311
6311
6311
6311
6311
6324
6324
6324
6331
6331
6331
6331
6331
6331
6331
Control Sample
Starbucks Corp
Walgreen Co
Zale Corp
Amazon.Com Inc
Symbion Health Ltd - ADR
Borders Group Inc
Toys R Us Inc
BBVA Banco Frances Sa - ADR
M & T Bank Corp
AmSouth Bancorporation
UnionBanCal Corp
SouthTrust Corp
Espirito Santo Financial-ADR
Comerica Inc
U S Bancorp
MBNA Corp
SunTrust Banks Inc
Westpac Banking Corp - ADR
Australia & Nw Zlnd Bk - ADR
FleetBoston Financial Corp
Banco Bilbao Vizcaya - ADR
Barclays Plc/England - ADR
Bank Of America Corp
Toyota Motor Credit Corp
American Express Credit Corp
ORIX Corp - ADR
Household Finance Corp
General Electric Cap Corp
Lehman Brothers Holdings Inc
Merrill Lynch & Co Inc
Credit Suisse Group - ADR
ING Life Ins & Annuity Co
American National Insurance
Jefferson-Pilot Corp
Sun Life Financial Inc
MetLife Inc
ING Groep NV - ADR
WellPoint Inc
UnitedHealth Group Inc
Gainsco Inc
Berkley (W R) Corp
Unitrin Inc
Old Republic Intl Corp
Fairfax Financial Holdings
Safeco Corp
CAN Financial Corp
Royal & Sun Alliance Insrnc
SIC Code
5812
5912
5944
5961
5912
5940
5945
6020
6020
6020
6020
6020
6020
6020
6020
6020
6020
6020
6020
6020
6020
6020
6020
6141
6153
6172
6141
6159
6211
6211
6211
6311
6311
6311
6311
6311
6311
6324
6324
6331
6331
6331
6331
6331
6331
6331
6331
IT Leader Sample
Markel Corp
LandAmerica Financial Gp
Equity Office Properties Tr
Marriott Intl Inc
Block H & R Inc
Equifax Inc
CDI Corp
Volt Info Sciences Inc
EarthLink Inc
American Management Systems
Silicon Graphics Inc
Intuit Inc
Cadence Design Systems Inc
Electronic Arts Inc
PeopleSoft Inc
BMC Software Inc
Perot Systems Corp
Affiliated Computer Services
Hewitt Associates Inc
Unisys Corp
Oracle Corp
Kelly Services Inc - Cl A
Administaff Inc
Sabre Holdings Corp - Cl A
Spherion Corp
Reynolds & Reynolds - Cl A
ABM Industries Inc
Ryder System Inc
MGM Mirage
Harrahs Entertainment Inc
Sun Healthcare Group Inc
Kindred Healthcare Inc
Community Health Systems Inc
Universal Health Svcs - Cl B
Laboratory Cp Of Amer Hldgs
Quest Diagnostics Inc
Advocat Inc
BearingPoint Inc
Tyco International Ltd
SIC Code
6351
6361
6798
7011
7200
7320
7363
7363
7370
7370
7370
7372
7372
7372
7372
7372
7373
7374
7374
7373
7372
7363
7363
7373
7363
7373
7340
7510
7990
7990
8051
8051
8062
8062
8071
8071
8051
8742
9997
Control Sample
PMI Group Inc
Fidelity National Finl Inc
Simon Property Group Inc
Intercontinental Hotels - ADR
Service Corp International
Dun & Bradstreet Corp
Mps Group Inc
Robert Half Intl Inc
Sra International Inc
GTECH Holdings Corp
IAC/Interactive Corp
Autodesk Inc
Sybase Inc
Intergraph Corp
Adobe Systems Inc
SunGard Data Systems Inc
CGI Group Inc - Cl A
DST Systems Inc
Fiserv Inc
Computer Sciences Corp
Manpower Inc/Wi
Interpublic Group Of Cos
Intl Lease Finance Corp
United Rentals Inc
Brinks Co
Konami Corp - ADR
Convergys Corp
Avis Budget Group Inc
Trump Entertainment Resorts
Caesars Entertainment Inc
Mariner Health Care Inc
Beverly Enterprises Inc
Health Management Assoc
Triad Hospitals Inc
Manor Care Inc
Coventry Health Care Inc
AmeriPath Inc
Washington Group Intl Inc
Berkshire Hathaway
SIC Code
6351
6361
6798
7011
7200
7320
7363
7363
7370
7370
7370
7372
7372
7372
7372
7372
7373
7374
7374
7370
7363
7311
7359
7350
7381
7372
7389
7510
7990
7990
8051
8051
8062
8062
8051
8011
8071
8711
9997
A7
Appendix B
Matched Sample Comparison of Firms at the Four Digit SIC Classification Level
Appendix B1. Results of Hypotheses Tests
2001
Measurement
ROA
ROS
Category
IT Leaders
0.014
0.023
Control
0.003
0.015
IT Leaders
0.026
0.033
-0.001
0.036
Control
OI/A
OI/S
IT Leaders
0.062
0.060
Control
0.054
0.059
IT Leaders
0.101
0.078
Control
0.092
0.081
IT Leaders 47.209 22.920
OI/E
Control
COG/S
SGA/S
OPEXP/S
2002
2003
2004
Mean Median Z Value P Value Mean Median Z Value P Value Mean Median Z Value P Value Mean Median Z Value P Value
43.195 17.861
IT Leaders
0.661
0.709
Control
0.683
0.707
IT Leaders
0.248
0.239
Control
0.235
0.208
IT Leaders
0.836
0.863
Control
0.835
0.865
2.119
0.017* 0.015
*
0.008
0.025
1.416
0.078*
0.026
0.039
-0.016
0.031
1.525
0.064*
0.060
0.060
0.061
0.062
0.977
0.164
0.108
0.083
0.109
0.088
0.208
0.418
-2.027
0.016
45.668 19.494
57.495 22.892
0.021* 0.653
*
0.667
0.710
0.250
0.249
0.235
0.204
0.831
0.864
0.822
0.857
1.364
0.914
-0.514
0.304
0.710
2.208
0.014* 0.088
*
0.028
0.024
3.183
0.001* 0.096
**
0.053
0.048
0.193
0.424
0.065
0.060
0.068
0.062
0.180
0.429
-0.857
0.804
-1.433
0.076*
1.769
0.962
0.496
0.690
0.119
0.093
0.101
0.715
0.702
0.241
0.239
0.232
0.216
0.823
0.859
0.812
0.854
0.062
0.054
0.067
0.080
0.068
0.077
0.069
0.365
-0.892
0.814
-1.269
0.898
-2.149
0.984
-0.411
0.340
0.700
0.758
1.597
0.945
P Value
Mean
Median
0.029
0.033
0.037
0.036
0.061
0.067
-0.055
0.070
56.049 26.474
0.653
0.066
0.344
69.734 31.083
0.646
0.037
0.032
0.537
0.057
0.123
0.039
0.035
-0.092
0.027
0.142
0.113
0.114
0.115
69.423 42.116
79.590 37.655
0.626
0.687
0.668
0.698
0.240
0.245
0.230
0.213
0.804
0.838
0.824
0.834
1.332
0.091*
0.707
0.240
-0.134
0.553
-0.181
0.572
-1.565
0.941
-1.081
0.140
0.586
0.721
0.930
0.824
This table is comparable to Table 5, which reports the same data analysis using a single-firm control benchmark.
Appendix B2. Results of Test of Performance Sustainability

2005
Measurement
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
Category
Mean
Median
IT Leaders
0.040
0.034
Control
0.037
0.029
IT Leaders
0.066
0.062
Control
0.020
0.063
IT Leaders
0.080
0.068
Control
0.079
0.066
IT Leaders
0.140
0.115
Control
0.119
0.118
IT Leaders
70.094
46.139
Control
80.183
39.062
IT Leaders
0.632
0.687
Control
0.665
0.701
IT Leaders
0.240
0.241
Control
0.222
0.202
IT Leaders
0.809
0.834
Control
0.822
0.844
2006
Z Value
P Value
0.389
0.349
-0.127
0.551
-0.273
0.608
-0.376
0.647
-1.878
0.970
-1.035
0.150
1.387
0.917
0.980
0.837
Mean
Median
0.042
0.036
0.044
0.035
0.078
0.072
0.033
0.071
0.081
0.064
0.080
0.065
0.141
0.121
0.130
0.119
83.210
49.592
98.986
46.879
0.635
0.709
0.660
0.696
0.242
0.237
0.222
0.193
0.813
0.829
0.816
0.831
2007
Z Value
-0.171
0.568
--0.352
0.638
-0.684
0.753
-1.148
0.874
-1.878
0.970
-0.741
0.229
1.565
0.941
1.681
0.954
A8
0.076
0.065
0.072
0.065
0.126
0.112
-0.042
0.113
73.270
56.074
48.155
40.820
0.651
0.701
0.830
0.712
0.235
0.225
0.211
0.175
0.825
0.845
0.982
0.834
Z Value
P Value
-0.743
0.771
-0.545
0.707
0.074
0.471
-0.408
0.658
-0.771
0.780
-0.888
0.187
1.614
0.947
0.504
0.693
Appendix B3. Regression Analysis

2002
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
Model
1
2
1
2
1
2
1
2
1
2
1
2
1
2
1
2
Model
1
2
1
2
1
2
1
2
1
2
1
2
1
2
1
2
N
356
356
356
356
322
356
222
356
N
348
348
348
348
324
348
216
348
R-Square Change
0.305
0.000
0.091
0.005
0.708
0.004
0.746
0.001
0.734
0.004
0.933
0.000
0.945
0.000
0.845
0.000
2003
R-Square Change
0.001
0.003
0.012
0.001
0.768
0.000
0.802
0.000
0.884
0.000
0.867
0.000
0.955
0.000
0.846
0.000
2001 Financial
Performance
0.604***
0.604***
0.359***
0.353***
0.784***
0.786***
0.862***
0.863***
0.871***
0.873***
0.998***
0.999***
0.967***
0.966***
0.950***
0.950***
2002 Financial
Performance
-0.192
-0.208
0.240**
0.232**
0.785***
0.784***
0.945***
0.944***
1.027***
1.027***
0.986***
0.986***
0.933***
0.933 ***
0.996***
0.996***
Dummy
-0.048
-0.029
0.005
0.007
11.438**
-0.006
-0.003
-0.005
Dummy
-6.237
-0.032
0.003
0.004
1.268
-0.005
-0.002
-0.001
A9
Appendix B3. Regression Analysis (Continued)

2004
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
A10
Model
1
2
1
2
1
2
1
2
1
2
1
2
1
2
1
2
Model
1
2
1
2
1
2
1
2
1
2
1
2
1
2
1
2
N
328
330
328
328
304
328
214
328
N
306
306
306
306
298
306
200
306
R-Square Change
0.026
0.001
0.004
0.002
0.550
0.001
0.420
0.003
0.891
0.000
0.569
0.002
0.967
0.000
0.461
0.003
2005
R-Square Change
0.443
0.000
0.824
0.000
0.805
0.000
0.957
0.000
0.709
0.000
0.953
0.001
0.934
0.000
0.958
0.000
2003 Financial
Performance
-0.015***
-0.015***
-0.023
-0.023
0.709***
0.710***
1.399***
1.401***
0.965***
0.965***
1.165***
1.164***
0.960***
0.960***
1.399***
1.403***
2004 Financial
Performance
0.668***
0.667***
2.413***
2.411***
1.026***
1.026***
0.721***
0.722***
0.813***
0.813***
0.785***
0.785***
0.924***
0.923***
0.731***
0.732***
Dummy
-0.431
-0.013
-0.004
-0.033
-1.051
0.031
0.002
0.032
Dummy
-0.090
-0.014
0.000
0.002
0.171
-0.006
-0.002
-0.005
Appendix B3. Regression Analysis (Continued)

2006
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
Model
1
2
1
2
1
2
1
2
1
2
1
2
1
2
1
2
Model
1
2
1
2
1
2
1
2
1
2
1
2
1
2
1
2
N
288
288
288
288
286
288
186
288
N
270
270
270
270
268
270
174
270
R-Square Change
0.516
0.000
0.971
0.000
0.732
0.000
0.937
0.001
0.627
0.000
0.957
0.001
0.975
0.000
0.940
0.000
2007
R-Square Change
0.165
0.001
0.022
0.003
0.507
0.001
0.016
0.001
0.025
0.002
0.007
0.004
0.921
0.001
0.005
0.003
2005 Financial
Performance
0.752***
0.752***
0.895***
0.895***
0.857***
0.857***
0.772***
0.773***
1.218***
1.217***
0.836***
0.836***
1.022***
1.022***
0.790***
0.790***
2006 Financial
Performance
0.621***
0.620***
-1.839**
-1.824**
0.854***
0.854***
-1.585**
-1.567**
-0.255**
-0.252**
0.601
0.595
0.926***
0.924***
-0.808
-0.777
Dummy
0.305
-0.003
0.002
0.007
5.635
-0.005
0.001
-0.008
Dummy
0.568
-0.111
-0.005
-0.159
-21.685
0.176
-0.006
0.148

Model 1: Performance measure for year t = f(Performance measure for year t-1)
Model 2: Performance measure for year t = f(Performance measure for year t-1, dummy: 1 = IT leaders, 0 = control firms )
ROA: return on assets; ROS: return on sales; OI/A: operating income to assets; OI/S-operating income to sales; OI/E: operating income to
employees; OPEXP/S: operating expense to sales; COG/S: cost of goods sold to sales; SGA/S: selling and general administration expense to
sales
A11
Appendix C
Summary of Medians from 1991 to 2007
IT Leader
ROA
ROS
OI/A
OI/S
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
0.038
0.036
0.035
0.048
0.045
0.044
0.042
0.038
0.040
0.031
0.023
0.027
0.028
0.040
0.041
0.046
0.046
Control
0.015
0.008
0.018
0.028
0.041
0.042
0.036
0.033
0.031
0.033
0.020
0.025
0.024
0.036
0.041
0.044
0.041
IT Leader
0.054
0.035
0.048
0.060
0.057
0.059
0.053
0.054
0.058
0.051
0.031
0.035
0.045
0.052
0.060
0.062
0.057
Control
0.022
0.016
0.024
0.034
0.053
0.057
0.051
0.048
0.052
0.048
0.033
0.036
0.042
0.053
0.065
0.062
0.064
IT Leader
0.148
0.150
0.148
0.147
0.098
0.095
0.091
0.090
0.086
0.078
0.062
0.066
0.067
0.075
0.079
0.078
0.079
Control
0.107
0.099
0.149
0.115
0.090
0.089
0.082
0.073
0.067
0.073
0.060
0.067
0.068
0.071
0.074
0.076
0.074
IT Leader
0.153
0.142
0.160
0.170
0.116
0.111
0.109
0.110
0.117
0.115
0.074
0.081
0.083
0.097
0.109
0.099
0.103
Control
0.110
0.107
0.109
0.130
0.105
0.104
0.103
0.091
0.096
0.092
0.077
0.088
0.091
0.100
0.110
0.109
0.102
IT Leader 27.170 31.790 35.050 43.140 22.606 23.039 21.711 22.751 25.077 26.979 17.750 19.074 21.068 28.300 30.370 33.980 36.080
OI/E
Control
IT Leader
COG/S
SGA/S
19.830 19.820 21.980 28.430 23.902 26.729 24.368 22.160 22.985 22.872 16.940 19.848 20.593 26.808 29.564 30.834 33.092
0.670
0.670
0.630
0.660
0.679
0.683
0.697
0.695
0.700
0.710
0.696
0.690
0.694
0.694
0.688
0.694
0.684
Control
0.720
0.720
0.720
0.710
0.684
0.695
0.696
0.696
0.694
0.703
0.709
0.707
0.708
0.708
0.701
0.706
0.707
IT Leader
0.220
0.230
0.230
0.220
0.193
0.196
0.197
0.204
0.204
0.191
0.204
0.213
0.214
0.200
0.201
0.197
0.192
Control
OPEXP/S IT Leader
Control
0.210
0.210
0.190
0.210
0.190
0.187
0.190
0.194
0.202
0.203
0.200
0.206
0.204
0.190
0.184
0.174
0.183
0.850
0.860
0.840
0.840
0.857
0.858
0.858
0.857
0.857
0.857
0.878
0.875
0.872
0.861
0.857
0.858
0.854
0.890
0.897
0.897
0.887
0.858
0.857
0.860
0.861
0.855
0.853
0.869
0.867
0.865
0.860
0.854
0.854
0.857
ROA: return on assets; ROS: return on sales; OI/A: operating income to assets; OI/S-operating income to sales; OI/E: operating income to employees; OPEXP/S:
Method
In the process of drawing the charts in Figures 2 to 9, we obtained medians for the companies from 1991 to 1994 from Bharadwaj (2000). For
data from 2001 to 2007, we used our own results shown in Table 5 and 6. An important issue was how to collect the medians from 1995 to
2000.1 One option was to chart each performance measure excluding those years, but we decided to calculate the medians of each performance
variable for the IT leader group and the control group from 1995 to 2000 because such information is essential to truly understand how being
an IT leader changes over time. Therefore, we repeated the same research method described earlier.
This time, the only difference was to use the IT leaders from 1995 to 1998 and to identify corresponding control companies. Like previous
tests, the firms with superior IT capability are those listed in IW 500 from 1995 to 1998, and the IT leader sample was selected from the firms
listed in IW 500 for at least two of the four years. This produced a list of 522 firms. Consistent with other studies, the matching control
companies were matched for size and industry. Only 270 IT leaders out of the 522 qualified firms have compatible control companies with
similar industry and firm size. Once we identified IT leaders and control firms, it is relatively straightforward to calculate the medians of
performance measures from 1995 to 1998. The last issue was to acquire data from 1999 to 2000, and we decided to use the same IT leaders
and control group from 1995 to 1998 to get the medians from 1999 and 2000 because, as we posited in Hypotheses 3, 4, 7, and 8, IT capability
should be sustainable over time.2 Finally, it is worth noting that while this whole process was exploratory, it was worthy of conducting to better
understand the underlying trends of how the value of being an IT leader changes.
1
We didnt use data from Santhanam and Hartono (2003) because the medians in their study included all of the firms in the industry, rather than limiting to
matching control companies with similar size.
2
In addition to collecting means and medians, we also conducted pair-wise Wilcoxon signed-rank test using the IT leaders and controls from 1995 to 2000 shown
in Appendix D.
A12
Appendix D
Results of Wilcoxon Signed-Rank Test of IT Leader Groups and
Control Groups from 1995 to 2000
1995
Measurement
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
Mean
Median
IT Leader
Category
4.972
4.527
Control
4.095
4.127
IT Leader
0.061
0.057
Control
0.052
0.053
IT Leader
0.102
0.098
Control
0.093
0.090
IT Leader
0.135
0.116
Control
0.131
0.105
IT Leader
33.780
22.606
Control
75.938
23.902
IT Leader
0.654
0.679
Control
0.663
0.679
IT Leader
0.206
0.193
Control
0.206
0.190
IT Leader
0.837
0.857
Control
0.846
0.858
1996
Z Value P Value
1.975
0.024**
1.221
0.111
2.058
0.020**
0.800
0.212
-2.065
0.981
-0.568
0.285
-0.269
0.394
-0.821
0.206
Mean
Median
4.802
4.371
4.491
4.162
0.067
0.059
0.059
0.057
0.098
0.095
0.090
0.089
0.132
0.111
0.128
0.104
34.800
23.039
52.903
26.729
0.656
0.683
0.668
0.695
0.206
0.196
0.204
0.187
0.837
0.858
0.846
0.857
1997
Z Value P Value
1.554
0.060*
1.735
0.041**
2.034
0.021**
1.443
0.075*
-1.790
0.963
-0.690
0.245
0.401
0.656
-1.326
0.092*
Mean
Median
3.866
4.212
4.036
3.626
0.058
0.053
0.054
0.051
0.096
0.091
0.088
0.082
0.128
0.109
0.125
0.103
35.120
21.711
50.686
24.368
0.664
0.697
0.666
0.696
0.204
0.197
0.208
0.190
0.840
0.858
0.846
0.860
Z Value
P Value
1.195
0.116
1.811
0.035**
2.138
0.016**
1.066
0.143
-1.391
0.918
-0.151
0.440
0.062
0.525
-1.064
0.144

1998
Measurement
ROA
ROS
OI/A
OI/S
OI/E
COG/S
SGA/S
OPEXP/S
Mean
Median
IT Leaders
Category
3.847
3.79
Control
3.026
3.254
IT Leaders
0.054
0.054
Control
0.051
0.048
IT Leaders
0.095
0.090
Control
0.080
0.073
IT Leaders
0.127
0.110
Control
0.116
0.091
IT Leaders
34.866
22.751
Control
51.841
22.160
IT Leaders
0.658
0.695
Control
0.666
0.696
IT Leaders
0.206
0.204
Control
0.217
0.194
IT Leaders
0.842
0.857
Control
0.850
0.861
1999
Z Value P Value
1.734
0.041**
1.347
0.089*
2.936
0.003***
2.048
0.020**
0.074
0.941
-0.498
0.309
-0.922
0.178
-0.859
0.195
Mean
Median
5.046
3.962
3.243
3.092
0.070
0.058
0.055
0.052
0.099
0.086
0.074
0.067
0.132
0.117
0.118
0.096
39.384
25.077
40.501
22.985
0.655
0.700
0.661
0.694
0.212
0.204
0.224
0.202
0.837
0.857
0.847
0.855
2000
Z Value P Value
1.645
0.000***
1.681
0.045**
3.702
0.000***
2.522
0.006***
1.276
0.101
-0.293
0.385
-1.018
0.154
-1.200
0.115
Mean
Median
4.610
3.142
2.956
3.261
0.061
0.051
0.058
0.048
0.096
0.078
0.069
0.073
0.126
0.115
0.105
0.092
40.869
26.979
38.022
22.872
0.669
0.710
0.671
0.703
0.206
0.191
0.225
0.203
0.841
0.857
0.852
0.853
Z Value P Value
1.969
0.025**
0.692
0.245
3.594
0.000***
2.547
0.005***
1.348
0.178
-0.115
0.454
-1.528
0.063
-0.773
0.220

A13
References
Bharadwaj, A. S. 2000. A Resource-Based Perspective on Information Technology Capability and Firm Performance: An Empirical
Investigation, MIS Quarterly (24:1), pp. 169-196.
Santhanam, R., and Hartono, E. 2003. Issues in Linking Information Technology Capabilities to Firm Performance, MIS Quarterly (27:1),
pp. 125-153.
A14
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RESEARCH NOTE

INFORMATION TECHNOLOGY CAPABILITY AND FIRM

Chang E. Koh and Victor R. Prybutok

effect of IT on firm performance (Carr 2003; Clemons 1986,

MIS Quarterly Vol. 38 No. 1 pp. 305-326/March 2014

Chae, Koh, & Prybutok/IT Capability and Firm Performance

with or even exceed the IT capabilities of their competitors

MIS Quarterly Vol. 38 No. 1/March 2014

In the following subsections, we summarize the early studies

Study by Bharadwaj in 2000

Study by Santhanam and Hartono in 2003

Chae, Koh, & Prybutok/IT Capability and Firm Performance

Finally, they tested the sustained effects of IT capability.

capability increase their revenue by obtaining valuable

MIS Quarterly Vol. 38 No. 1/March 2014

Chae, Koh, & Prybutok/IT Capability and Firm Performance

Table 1. Comparisons Between Earlier Studies and Current Study

IT leader versus control

Business performance measured by profit and cost

Business performance measured by profit and cost

Business performance measured by profit and cost

curve is nontrivial and represents considerable time and effort

Financial Halo Effect

MIS Quarterly Vol. 38 No. 1/March 2014

cial performance. Otherwise, the comparisons of business

Chae, Koh, & Prybutok/IT Capability and Firm Performance

H6: The average cost ratios of firms that have superior IT

Sample Selection: IT Leaders

MIS Quarterly Vol. 38 No. 1/March 2014

Chae, Koh, & Prybutok/IT Capability and Firm Performance

Table 2. Steps of Sample Selection

Identify companies listed in the IW 500 from 2001 to 2004

Select IT leaders with comparable companies

561 IT leaders, only 296 have compatible control companies

MIS Quarterly Vol. 38 No. 1/March 2014

choice of benchmark firms becomes less problematic because

Chae, Koh, & Prybutok/IT Capability and Firm Performance

T-test for Difference

Table 4. Summary of Constructs and Measurement

Sustained higher profit and

general administrative expenses to sales (SGA/S). As used by

these pairs. Using the Wilcoxon signed-rank test is effective

The financial data was obtained from the Compustat database.

Like Santhanam and Hartonos study, we used the same

Sustainability of superior business performance is measured

MIS Quarterly Vol. 38 No. 1/March 2014

Chae, Koh, & Prybutok/IT Capability and Firm Performance

Adjustment for Financial Halo Effect

MIS Quarterly Vol. 38 No. 1/March 2014

Table 8 summarizes the results of the hypotheses tests. None

In order to alleviate a concern to use a single control (benchmark) firm

Chae, Koh, & Prybutok/IT Capability and Firm Performance

Table 5. Results of Hypotheses Tests

Table 6. Results of Test of Performance Sustainability

MIS Quarterly Vol. 38 No. 1/March 2014

Chae, Koh, & Prybutok/IT Capability and Firm Performance

Table 7. Regression Analysis

MIS Quarterly Vol. 38 No. 1/March 2014

2001 Financial Performance

2002 Financial Performance

2003 Financial Performance

Chae, Koh, & Prybutok/IT Capability and Firm Performance

Table 7. Regression Analysis (Continued)

2004 Financial Performance

IT Capabilities & Organizational Performance

IT Capabilities & Organizational Performance