|Adm. - Grad.||2011 - 2013|
|Dir.; Codir.||Stéphane Gagnon|
Market-Perceived Risk of Project-Related Announcements in the Information Technology Industry
Large, publicly traded firms often issue public announcements, whether related to ongoing pro-jects (e.g., new product, major investment, joint venture) or general organizational issues (e.g., leadership, markets, finances). Financial markets have varying perceptions of the risks implied by these announcements and their potential impact on profitability. They are perceived differently depending on the relative rigidity of the organization’s cost structure.
For example, if faced with the same event, a highly flexible manufacturing company that easily adapts to demand fluctuations should be perceived as less risky, compared to a project-oriented company where large, ongoing projects represent significant fixed costs, with a high risk of difficulties in adapting to shifting economic conditions. Furthermore, project-related news should have more of an impact on project-oriented companies, as these directly affect their riskiness, while the perceived risk in the manufacturing sector should be more affected by general organizational issues that may impede or reduce the flexibility of the production network.
To explore these hypotheses, we perform an event study to test how financial markets perceive the implicit risks from a firm’s public announcements, related both to specific projects and to general organizational issues. To clearly isolate organization-specific risk, we choose to compare the responses of two segments of the information technology industry, software, and computers. Both segments face the same demand fluctuations and economic conditions, while they differ radically in terms of organizational and cost rigidities: software companies are project-oriented, while computer manufacturers are among the most flexible and efficient in the entire economy, mostly due to extensive network-driven and outsourced production.
We developed a web solution that automatically downloads from Yahoo! Finance all the data and news related to the S&P 500 index companies. The software runs over a 10-day or 2-week period, and downloads data and news minute-by-minute. The news is filtered and reduced to 76 news items, selecting only those dealing clearly with the target companies in our 2 segments, which consist of 14 software firms (of which 12 firms had 35 news items) and 10 computer and peripherals manufacturers (of which 7 firms had 41 news items). Overall, 52 news items (68%) are project-related, while the rest are regarding organizational and economic issues.
The data was then analyzed using an event study methodology. The Capital Asset Pricing Mod-el (CAPM) was used to estimate the Abnormal Returns (ARs) for each firm and event, but un-fortunately produced insignificant results, so we pursued our research with raw returns. The minute-by-minutes were cumulated -30 prior and +30 after each event. We computed the key changes and moments in these windows and produced pivot tables to help compare the market perceived risk of each industry segment for each type of news. We tested our hypotheses for distinctive and significant differences in the perceived risks, using a paired-sample t-test on difference between the means of each period.
Our results allow us to confirm almost all our hypotheses, with only 1 of 8 unsupported. This study may provide valuable information to both project and company executives who wonder about the market-perceived risk of project and non-project announcements. For instance, our results show that the risk responses for the computer industry are less than the risk responses for the software industry. Moreover, the news has a larger impact in the case of non-project news in the computer segments, compared to project news in the software segment.
Project managers in the IT industry are therefore invited to consider planning their project announcements by optimizing the perceived risk by financial markets.