IT and Profit Persistence: The Role of Intangibles and Risk

We examine the impacts of information technology (IT) intangibles and risk on profit and its retention in heterogeneous competitive environments. We show that IT leaders achieve higher abnormal profits through IT intangibles possibly due to their leading position and skills in exploiting IT than their peers while a portion of benefits is attributable to higher risk. We also find evidence that abnormal profit accruing to IT leaders is retained over a reasonable time horizon while its sustainability is dependent on the degree of competition. Consistent with our expectation, the positive impacts of R&D and advertisement intensities on profit are competed away when the degree of competition is high. However, IT intangibles contribute to profits for both IT leaders and their peers without regard for the degree of competition. Interestingly, our results further suggest that firms in a leading position in IT (i.e., IT leaders) are able to achieve higher profits through IT intangibles relative to their peers in a more competitive environment. Overall, our study sheds new light on the economic gains that accrue to IT leaders and their counterparts and highlight the critical role of the IT intangibles and risk and their interplay with competition.