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Y2K Investment Impact onFirm Value
An Australian Study
Moses Lo, Donald Winchester
School of Information Systems, Technology and Management
University of New South Wales, Sydney, Australia
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INTRODUCTIONDo IT investments add value to corporations? Researchers and business practitioners have
sought to assess how IT investments add value to corporations, if at all. Famously, Carr
(2003) argued that IT did not matter. Subsequent research has concluded otherwise and
has discovered various relationships between IT investment characteristics and the affect
on firm value.
WHAT IS Y2K?
Year 2000 software problem rooted in 3 programming issues:
1. Common programming practice of storing dates as final two digits eg 1900 = 00, 2000
= 00
2. 2000 may not have been considered a leap year
3. Programming practice often used certain numbers as reserved values, eg 00
WHY Y2K?
– Unique IT Problem:
1. Deadline for implementation fixed
2. Pervasive worldwide ($300-600 billion USD bill)
– IT investment during a worldwide crisis– This information could be useful to navigating corporations through future crises
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– Current literature is few and provides inconclusive results
– Current literature is lacking in the Australian context where government played an
integral role in requiring Y2K disclosure
– Understand how stock markets react to compliance projects and how to organize
future spend
– Government can take away lessons on managing market reactions and regulatoryguidance
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METHODS
RESEARCH QUESTION
How do IT investment announcements regarding Year 2000 (Y2K) compliance affect the
market value of companies?
RESEARCH METHOD
Data Collection
Y2K Investment announcements for 18 months prior to 2000
Stock Price Data (ASX)
Index Price Data (ASX)
Coding
Open Coding fed the research model
Analysis
Event Study Methodology
Regression Analysis
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RESEARCH MODEL
Stock Market Reaction
Industry
Firm Size
Initial Y2K Investment Announcement
Cost of Y2KRemediation Effort
Third Party
Involvement
H1
Compliance Approach
Affected Systems
Potential Impact of Y 2K
Contingency Plans
Stock Market ReactionChange to Cost of Y2K Remediation Effort
H2
Stock Market ReactionCompletion of Y2K Remediation EffortH3
Timing
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RESULTS
DESCRIPTIVE STATISTICS
Initial Y2K Announcements where Cost ≥ $100,000Ye
ar Banks Mining
Manufacturi
ng
Othe
r
Full
Sample
1998 9 11 8 26 54
1999 2 2 5 9 Total 9 13 10 31 63
Median Cost of Y2K Remediation
Effort $ 750,000
Median Market Capitalisation
$
206,031,92
0
Median Cost/MarketCapitalisation 0.33%
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INITIAL Y2K INVESTMENT ANNOUNCEMENTS
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COST OF Y2K INVESTMENT
Initial Y2K Investment Announcements Panel A: Estimated Cost
≥ $750,000
(N=32)
< $750,000
(N=31)Event
Window CAAR
Patell
Z CAAR Patell Z
(-1,+1)
-
0.84% -0.943
-
2.91
%
-
3.012**
(-5,+5)
-
1.34% -1.173
-
3.42
% -1.842* Panel B: Estimated Cost as a % of Market
Capitalisation
≥ 0.34%
(N=32)
< 0.34%
(N=31)Event
Window CAAR
Patell
Z CAAR Patell Z
(-1,+1)
-
1.71%
-
1.387
$
-
2.04
%
-
2.469**
(-5,+5)
-
2.51% -0.916
-
2.21
% -2.047*
The symbols $,*,**, and *** denote statistical
significance at the 0.10, 0.05, 0.01 and 0.001levels, respectively, using a generic one-tail
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test.
Legend
-ve (SS)$1k $100k
+ve (NS) -ve (SS)-ve (NS)
-ve (WS)$750kNot Significant,Minimal,
Not Material
NS = Not SignificantWS = Weaker Ev idence for SignificanceSS = Stronger Evidence for Significance
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INDUSTRY EFFECT
Banks (N=9) Mining (N=13) Manufacturing (N=10)Event
Window CAAR Patell Z CAAR Patell Z CAAR Patell Z
(-1,+1) 0.97% 0.586
-
4.97% -2.398** -3.64% -2.883**
(-5,+5)
-
0.38% -0.285
-
6.31% -1.267 -4.49% -3.129***
SIZE EFFECT
Market Cap >
$200m (N=32)
Market Cap <
$200m (N=31)Event
Window CAAR Patell Z CAAR Patell Z
(-1,+1)
-
1.70% -2.556**
-
2.05% -1.315$
(-5,+5)
-
1.33% -1.710*
-
3.43% -1.278
The symbols $,*,**, and *** denote statistical significance at the 0.10, 0.05, 0.01 and 0.001 levels, respectively, using a generic one-
tail test.
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CHANGE TO COST OF Y2K REMEDIATION EFFORT
Change to Cost of Y2K Compliance Over
Period 1998-1999
Panel A: Cost
Increase
Initial (N=8)
Cost Increase
(N=8)Event
Window CAAR
Patell
Z CAAR
Patell
Z
(-1,+1)
-
1.58%
-
1.194 1.38% 0.973
(-5,+5)
-
2.07%
-
0.686
-
0.31% -0.236
Panel B: Cost
Decrease Baseline
(N=1)
Cost Decrease
(N=1)Event
Window CAAR
Patell
Z CAAR
Patell
Z
(-1,+1)
-
7.34% -0.72
-
0.51% -0.068
(-5,+5)
-
27.29
%
-
1.394
$ 0.95% 0.068
The symbols $,*,**, and *** denote statisticalsignificance at the 0.10, 0.05, 0.01 and 0.001
levels, respectively, using a generic one-tail
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COMPLETION OF Y2K REMEDIATION
Y2K Completion Panel A: Completion of Y2K Remediation
EffortCompletion
(N=97)
EventWindow CAAR Patell Z(-1,+1) -0.06% -1.042
(-5,+5) -2.91%
-
3.199***
Panel B: Timing of Completion of Y2K
Remediation Effort
Round 1 (N=11)
Round 2
(N=24) Round 3 (N=62)Event
Window CAAR Patell Z CAAR
Patell
Z CAAR Patell Z
(-1,+1) -0.73% -1.049
2.04
% 0.892
-
0.69
% -1.332$
(-5,+5) -0.34% 0.053
-
4.99
%
-
0.746
-
2.56
% -3.550***
The symbols $,*,**, and *** denote statistical significance at the
0.10, 0.05, 0.01 and 0.001 levels, respectively, using a generic
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THIRD PARTY INVOLVEMENT
Third Party Involvement Panel A: Announcements of Y2K Effort with Third
Party Involvement
Third Party
Involvement (N=125)Event
Window CAAR Patell Z
(-1,+1) -1.27% -1.719*
(-5,+5) -0.61% -1.587$
The symbols $,*,**, and *** denote statistical significance at
the 0.10, 0.05, 0.01 and 0.001 levels, respectively, using a
generic one-tail test.
REGRESSION ANALYSIS
Comparison of Regression Models
Study
Variab
les
Event
Window
R2
Adjusted
R2
Ferguson et al.
(2005) 4 (-10,-1) 10.50%
4 (-10,0) 14.90%
4 (-10,1) 13.20% Telang and Wattal
(2007) 16 (0)
23.70
% 16.20%
Lin et al. (2007) 12 19% 13%15 20% 13%
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Khallaf and Skantz
(2007) 8 (-1,+1)
4.70
%
10 (-1,+1)
5.80
%
10 (-1,+1)
5.90
%
This Study 38 (-5,+5)37.40
% 33.64%
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SUMMARY OF RESULTS
Summary of ResultsHypothesis Result SummaryH1: Initial Y2K Announcement Rejecte
d
Mixed Results – Non event or significantly negative
a: Cost Effect Rejecte
d
Non event if less than $100,000 or not material; negative if cost ≥$100,00
b: Industry Effect Rejecte
d
Negative reaction for manufacturing > mining; non event for banks
c: Firm Size Effect Affirme
d
Negative reaction for market cap less than $200m > market cap greater than $200m
d: Third Party Involvement Rejecte
d
Negative reaction
e: Compliance Approach Rejecte
d
More positive to corporate governance, supplier assurances, explicit plan to
implement corrective actions, hardware upgrade; more negative to board
governance, parent company governance, IT vendor assurance, customer assurance,software upgrades
f: Affected Systems Rejecte
d
More positive to exposure to administrative systems
g: Potential Impact of Y2K Affirme
d
More negative to exposures to share registry, business operations, product and
service providers and utilities; more positive to exposures to customers and
buildings. Key finding that firms should disclose as little information to the market as
possible regarding risks.
h: Contingency Plans Rejecte
d
More negative to all contingency plans including business continuity plans,
contingency supplies and those in development. More positive to no contingencyplan.
H2: Change in Cost of Y2K
Remediation
Rejecte
d
Non event for cost increase and cost decrease
H3: Completion of Y2K Rejecte
d
Negative reaction
a: Timing of Completion Rejecte
d
Significantly negative reaction for round 3; non event for round 1 and 2
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CONCLUSIONS
The research question was posed: “How do IT investment announcements regarding Y2K
compliance affects the market value of companies”?
This research then resolved to undertake an event study and regression analysis to
understand how various variables affected the stock market reaction to Y2K investment
announcements, if at all. Relevant Y2K announcements were retrieved from the ASX and
an open coding process delivered a vast range of variables to be examined.
The results demonstrated that the market had a significant negative reaction to initial Y2K
announcements where the estimated cost of Y2K was greater than or equal to $100,000.
Below this threshold, the market reaction is best described as a non-event. This marketreaction was mediated by a number of variables including industry and firm size. These
variables altered the direction and magnitude of the market reaction. Changes to the cost
of Y2K remediation efforts had no effect on the market value of companies, with neither
cost increases nor decreases resulting in significant market reactions. Finally, the
announced completion of Y2K efforts received no significant reaction unless the
announcement occurred in the last round of required ASX Y2K disclosures.
These results concur with some of King and Winters (2008) conclusions. Namely, that therewas no first mover advantage in finishing the Y2K effort earlier then competitors and that
the market did not reward firms who completed Y2K efforts. However, in contrast to King
and Winters (2008), the results of this study suggested that the market reacted negatively
to firms who completed Y2K efforts 3 months prior to 2000. The results also generally
contrast Krishnan and Sriram (2000) and Anderson et al. (2001). These two studies used
the Ohlson (1995) model to conclude that Y2K investments were a value increasing activity.
This difference may be due to the type of model used to measure firm value, a difference in
location, differences in the sample and its size or the length of the event window.
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LITERATURE CITED
Carr, N.G., 2003 ‘IT Doesn’t Matter’. Harvard Business Review, pp. 41- 48.
King, E.W. and Winters, D.B. 2008 ‘Y2K: is there a lesson in the bug that did not bite?’,
Managerial Finance, vol. 34, no. 2, pp. 91-102.
Krishnan, Gopal V. and Sriram, Ram S. 2000 ‘An Examination of the Effect of It Investments
on Firm Value: The Case of Y2k-Compliance Costs. (Cover Story)', Journal of Information
Systems, vol.14, no.2, pp. 95-108.
Anderson, Mark C., Banker, Rajiv D., Natarajan, Ram and Ravindran, Sury. 2001,'Y2K
Spending by Entrepreneurial Firms’, Journal of Accounting & Public Policy , vol.20, no.4/5,
pp.323-347.
Ohlson, J. 1995 ‘Earnings, book values and dividends in security valuation’, Contemporary
Accounting Research (Spring), pp. 661-687
ACKNOWLEDGEMENTS
School of Information Systems, Technology and Management, University of New South
Wales, Australia
Dubravka Cecez-Kecmanovic, UNSW
Donald Winchester, UNSW
Fouad Nagm, UNSWDaniel Oost, UNSW