Persistent Profits & Transitory Losses: Role of IT Innovation Capability

Abstract

Motivated by the current recession, the realization that uncertainty will remain even when the economy recovers, and the fact that frequent performance slumps are becoming the norm in our hypercompetitive environment, we take up the following question: Does a company’s IT innovation capability (ITIC) strategy lead to value creation and affect its ability to recover from losses? Using a sample of large US firms during the recession of the early 2000s, we find that a systematic approach to ITIC not only leads to value creation (competitive advantage), but also substantially improves a firm’s ability to recover from negative earnings. Our overall results suggest that firms adopting a systematic approach to ITIC are better prepared to deal with the modern hypercompetitive environment than their non-systematic ITIC competitors.

Keywords: IT innovation capability, dynamic capabilities, earnings persistence, sustained value creation, recession

JEL Classification: M40