This study focuses on understanding how investments in information technology are reflected in the income statements and balance sheets of firms. Today, little doubt exists that information technology is being used by organizations in a wide variety of settings and ways and that information technology is critical for the smooth operation of many organizations. Further, a strong body of research exists showing that information technology usage is positively correlated with organizational productivity. However, empirical evidence of information technology contributing to corporate profitability has not been forthcoming. Although the income statements, balance sheets, and cash-flow statements all together summarize the financial structure, health and profitability of firms but still much doubt and confusion exists over the impacts of information technology usage on a firm's "hard" numbers such as revenues, cost, profit margins, or financial ratios and structure. So far, only a few studies have found a significant positive relationship between information technology and some aspect of corporate profitability. The present research argues that the inability of earlier studies to identify the relationship between information technology investments and bottom-line performance is in part because of methodological reasons. This study first defines and develops risk-adjusted measures of corporate profitability. Then, it examines the income statements and balance sheets of more than 500 firms that are leading users of information technology for the period 1988-98. Finally, the study shows that the relationship between information technology investments and corporate profitability is much better explained by using risk-adjusted measures of corporate profitability than using the same measures of corporate profitability but unadjusted for risk.
