The study comes from research conducted at the University of Maryland. The research is centered on the premise that bond markets value IT investments differently than stock markets according to the strategic roles of IT in industries and the types of risks they create. This requires a different strategy for investors to consider, according to Professor Sunil Mithas and Professor Michael Kimbrough.
Bonds are big business in the U.S. In 2016, for instance, $1.49 trillion was raised through corporate bonds; this surpasses, by a wide margin, funds financed through stock markets. As examples, Tesla, Amazon and Microsoft often make use of bond markets to access capital.
The new research has found that credit rating agencies and bond investors tend to favor information technology investments in companies where IT is used mostly primarily to help automate the business process. A second reason is where technology is used to facilitate richer information flows.
The things that are less favored are companies where IT transforms products, services and business models. This is because, the researchers argue, because the cash flows are particularly volatile in transform industries . This generates a downside risk in sthese types of industries for bondholders.
Since IT investments in transform industries carry a greater risk than in other sectors; companies should use bond markets strategically differently depending on which industries they operate in, the researchers recommend.
These research outcomes are important for technology investors since as companies invest more in different emerging digital technologies, like artificial intelligence and blockchain, investments in these technologies provide huge growth potential yet they may pose serious risks in implementing them.
The research has been published in the journal MIS Quarterly, with the research paper titled “Information Technology Investments and Firm Risk Across Industries: Evidence from the Bond Market.”
