Business Value of Information Technology Capabilities: An Institutional Governance Perspective

Situated in the U.S. electric utility industry in a period of significant market restructuring, our study investigates how market valuations of a firm’s investments to develop intrafirm and interfirm information technology (IT) capabilities are conditional on regulatory context. We find that firms are rewarded by investing in intrafirm IT capabilities in a more deregulated context, and by investing in interfirm IT capabilities in a more uncertain regulatory context. When deregulation expands customer choice, intrafirm IT capabilities create value by enabling greater efficiency and service reliability through coordination of a firm’s internal activities. When regulatory uncertainty increases for key aspects such as price control, value chain configuration, and information control, interfirm IT capabilities create value by enabling greater flexibility through reduction of external transaction costs with customers and suppliers. When allocating resources to develop IT capabilities, executives need to consider that market valuation of IT capabilities development is not static, but dynamic with changes in market structure and regulatory uncertainty. Regulators also need to consider that the regulatory context that they shape through their deliberations and decisions has a substantial impact on the market valuation of investments by firms to develop different types of IT capabilities. Prior research has differentiated intrafirm information technology (IT) capabilities that reduce internal coordination costs and interfirm IT capabilities that reduce external transaction costs. However, the influence of developing these capabilities on business value has not been explored in the realm of institutional governance—the regulatory context that defines the rules of the game for firms. We suggest that the value of a firm’s investments in different types of IT capabilities development (ITCD) is evaluated by the financial market contingent on the firm’s regulatory context. Our study is situated in the U.S. electric utility industry undergoing a market restructuring process to understand the impacts of intrafirm and interfirm ITCD on market value conditional on a firm’s regulatory context characterized by the extent to which its business is located in states that allow consumer choice (i.e., deregulation), as well as the extent to which its business is located in states that deliberate regulations regarding price control, value chain configuration, and information control (i.e., regulatory uncertainty). We find that intrafirm ITCD for enhancing efficiency is rewarded in a firm’s market valuation under a high level of deregulation. We further find that under a high level of regulatory uncertainty, interfirm ITCD for fostering flexibility can hedge against regulatory uncertainty and increase firm value. A key contribution of our work is demonstrating external institutional governance can influence the market value that firms accrue from different types of ITCD, thereby elaborating the complementarity in theoretical explanations of IT capabilities and institutional governance. History: Rajiv Kohli, Senior Editor; Huigang Liang, Associate Editor. Supplemental Material: The e-companion is available at https://doi.org/10.1287/isre.2023.1228 .