Honours Poster v2

8/7/2019 Honours Poster v2

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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



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



– 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



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



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



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%



INITIAL Y2K INVESTMENT ANNOUNCEMENTS



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



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



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.



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



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



one-tail test.



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%



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%



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



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.



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



Ivy Willyams, UNSW

SIRCA

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