IT Investment Commitment and Earnings Management : Theory and Evidence

This paper examines the relationship between a commonly observed strategic management behavior — real earnings management (REM) — and firms’ IT investment commitment (ITIC) in the context of IT infrastructure development. We also examine how the effects of REM may be influenced by three contingency factors: general corporate governance, IT decentralization, and corporate social responsibility. We employ a natural quasi-experiment to confirm the causal effects of REM on IT investment commitment. We find that REM undermines firms’ current commitment as well as future commitment to IT investments. These findings illuminate an important agency problem in IT investment. Results also suggest that both IT decentralization and corporate social responsibility mitigate the effect of REM on firms’ current commitment to IT investments, and corporate social responsibility also mitigates the effect of REM on firms’ future commitment to IT investments. General corporate governance, however, does not have any significant influence on the effects of REM. These findings generate important theoretical and practical implications to address agency problems in IT investment