The Value Relevance of Enterprise Resource Planning Information.

  • Jayantha Wickramasinghe

Student thesis: Doctoral Thesis

Abstract

The value of information technology investments is becoming a topical issue for corporate governance under the recent regulations enacted in the US (Sarbanes Oxley Act, US Congress, 2002). Increasingly, it is becoming clear that the absence of a definitive approach to evaluating IT investments is an impediment to the governance of corporations. Enterprise Resource Planning (ERP) information systems are a key IT implementation that has been promoted in both vendor and practitioner communities alike as a panacea for informed enterprise performance management. This research sets out a methodology for the evaluation of ERP’s contribution to enterprise value. This issue is important because billions of dollars of corporate funds have been invested in these systems since the early 1990s. Shareholders and management require a justification of ERP based upon its proven contribution to enterprise and shareholder value.The study develops a theory for the value relevance of ERP information by showing how ERP meets the requirement of a management and organizational innovation. Such an innovation promotes enterprise operations, improves enterprise performance,supports value creation, and increases shareholder wealth. A model is presented for testing the value of ERP adoption. Empirical testing proceeds in two phases. The first phase develops a model for forecasting normal performance.Performance is shown to be a function of autoregressive earnings moderated by macroeconomic factors impacting operations. The latter are associated with the business cycle. The estimated coefficients of the model are used for predicting the earnings performance of the firm. The residuals of actual earnings less the predicted represent abnormal performance. This represents the unique improvement in performance over the prior year after adjusting for macroeconomic effects.The second phase tests the value relevance of ERP information. A returns–earnings model developed by previous research is adapted with ERP–earnings interaction terms representing the ERP system’s effect on performance.Two classes of tests are performed on the model: tests of performance relevance of ERP systems, and tests of value relevance. The former tests ERP performance across several accounting metrics identified as indicators of firm performance level change. The latter tests the market response to these changes in a bid to determine if, in the perception of the market, the changes in the performance level attained to by the firm are associated with ERP adoption. These tests are performed for each year of a 5–year period following adoption.The results of the tests of performance relevance show that ERP–adopter firms do not achieve significant abnormal earnings in years 1 and 2 of the test period. They realize significant, negative, abnormal earnings in year 3. In years 4 and 5, they attain significant, positive, abnormal earnings. The tests of value relevance show that the market responds significantly to ERP adoption in year 2 of the test, but not in other years. The early response immediately after the year of adoption would seem to indicate a significant early expectation from these systems. However, this does appear to translate into long–term value relevance for ERP.
Date of Award2 Feb 2008
LanguageEnglish
Awarding Institution
SupervisorRaymond McNamara (Supervisor)

Cite this

The Value Relevance of Enterprise Resource Planning Information.
Wickramasinghe, J. (Author). 2 Feb 2008

Student thesis: Doctoral Thesis