Intangible Assets: How the Interaction of Computers and Organizational Structure Affects Stock Market Valuations

macroeconomics, Intangible Assets, Interaction, Computers, Organizational Structure, Stock Market Valuations

Network Effects and the Creation of Shareholders\u27 Wealth in the Context of Software Firm Mergers and Acquisitions

This paper investigates the reaction of financial markets to the announcement of a business combination between software firms. Based on the theory of economic networks, this article argues that mergers of software firms should lead to greater wealth creation because of the network effect theoretically linked to the combination of software products. This hypothesis is partially supported, as only the targets in software/software outperform those in the other categories, yielding abnormal returns of great magnitude. In addition, we could not conclude that controlling position in the target enabled bidders to make the appropriate technological decisions to ensure the emergence of network effects in the portfolio of the new entity and create additional wealth for the shareholders of both the bidder and the target. Future research is needed to better understand the effect of the different properties of the software pooled inside the product portfolio of the new entity

Why Information Technology Workers Own Their Firms: How the Relative Importance of Human Capital Affects Firm Ownership

Knowledge workers are critical for the production of goods and services in the information economy, and thus investment in human capital plays an increasingly important role in economic growth. Since firms cannot directly own human capital and cannot easily monitor or verify human capital investments made by their employees, they need to devise appropriate incentives to attract skilled employees and to encourage them to develop their human capital. One such scheme is employee ownership of the firm, and in this paper we use the theory of incomplete contracts to show that when investments in human capital are relatively more important, firms should be characterized by higher levels of employee ownership. Specifically, we employ a model of the firm where production requires both human capital and nonhuman (e.g., physical) capital. Because of the difficulty of ex ante contracting with employees and managers to invest in human capital specific to the firm, employees and users need to be given partial ownership of firm in order to increase their incentives to invest in human capital. As the importance of human capital relative to the physical capital employed by the firm increases, the model predicts an increase in the appropriate level of employee and serial ownership. We test this prediction through the empirical analysis of firm-level data in three high tech sectors, software, hardware, and biotechnology. Our results confirm the predicted relationship, and demonstrate that the high degree of managerial ownership in the IT industry in comparison to the biotechnology industry (e.g., managerial ownership in software companies is an order of magnitude higher than biotechnology companies) can be explained by the relative importance of human capital compared to physical capital in these industries

Intangible Assets: How the Interaction of Computers and Organizational Structure Affects Stock Market Valuations

An important theme in information systems research is that organizational factors are critical to the success of computer investments. This paper provides broad statistical evidence for this proposition. For our analysis, we have compiled a unique data set of over 1,000 firms which includes the total stock market value of firms, their installed base of computer capital, detailed measures of the organizational structures, and a battery of other factors. Using a theoretically-grounded model, we find that a one dollar increase in a firm’s installed computer capital is associated with an increase in the firm’s stock market valuation of over five dollars, while controlling for all other tangible assets. For this to be equilibrium, the financial markets must believe that each dollar of computer capital is accompanied by an average of over four dollars of intangible assets. We then identify a candidate for these intangible assets: certain organizational characteristics, involving the structure of decision- making and the nature of job design, are highly correlated with computer investments. While these organiza- tional characteristics do not appear on a firm’s balance sheet, we find that they lead to higher stock market valuations. Strikingly, firms that combine higher computer investments with these organizational characteristics have disproportionate increases in their market valuations. Our findings are quite robust to a variety of alternative models and the results are generally strengthened when we control for potential reverse causality. We conclude that the contribution of computers to a firm’s market value is increased when they are combined with certain intangible assets, specifically including the cluster of organizational changes that we have identified

Information Technology Workforce Structure and Compensation: Implications for Outsourcing

Some literature on information technology outsourcing has argued that the rise of outsourcing can be tied to IT labor market conditions. The purpose of this research is to investigate how IT workforce characteristics influence the distribution of workers between IT services (ITS) firms and non-ITS firms and the associated compensation. IT outsourcing literature points out that due to the economies of scale and scope and specialization in IT, ITS firms may have an advantage in hiring, retaining, and motivating highly skilled IT workers by providing better career opportunities and better compensation due to higher productivity. On the other hand, non-ITS firms may have to compensate IT workers better because they need to make specific investments in non-IT skills and, as a result, may have some hold up power over other employees. This study reports early results from an analysis of the U.S. Department of Labor’s Current Population (CPS) Survey from 1983-2001 and the U.S. population census for 2000. These results show that IT workers employed by ITS firms are better educated, younger, and proportionally more are male. The wage regression results show that holding other factors constant, ITS firms pay more than non-ITS firms for a given type of worker. However, there may be other factors, such as finer differentiation in worker qualification or job intensity, unobservable from our dataset that may influence the wage. Further research is suggested