ERP value: the market response to announcements of enterprise resource planning investments

This paper evaluates the change in a firm's equity value as a result of the firm announcing that it plans to integrate its operations with an enterprise resource planning (ERP) system, or a module of an ERP system. Investments in Information Systems (IS) are increasing as firms strive to optimize their business processes, and have become one of the largest categories of capital expenditures of U.S. businesses. There is a growing body of research based on evaluating the effects of such IT investments and their contribution to firm value. Using an event study approach, the event being the public announcement of ERP investment, and the measure being the change in stock price, we evaluate if ERP investments increase value for firms. Based on a sample of 89 firms publicly traded in U.S. stock markets during the period between 1999 and 2008, we conclude that ERP investments create an average of .81% (? significance = 0.05) incremental value for firms. We consider typical ERP component systems, and observe that supply chain management (SCM) systems are not rewarded with higher abnormal returns than non-SCM, but observe abnormally high amounts of positive compared to negative returns (normal asymmetry sign test, ? = 0.01). We examine ERP investments from well known vendors with established reputations in the market, and find that contract announcements with such vendors enjoy abnormal stock market returns of 1.40% (? = 0.01). We then look at firm function, and find that although manufacturing firms gain value (? = 0.05), that non-manufacturing firms do as well (? = 0.10). We evaluate firm size and financial health as attributes that contribute to ERP value and find that both large firms as well as financially healthy firms are rewarded incremental value by the market (? = 0.01). We also consider time period, and find that firms that engaged in post-2005 ERP investments gain significantly more than pre-2005 investments (? = 0.01). Finally, we consider firm and ERP system attributes as independent variables that may contribute to increased firm value as the dependent variable. The paper concludes with discussion about various considerations regarding the potential value created by ERP investments.