International Journal of Accounting Information Systems 15 (2014) 66–81
Contents lists available at ScienceDirect
International Journal of Accounting
Information Systems
The impact of adopting IT governance on
financial performance: An empirical analysis
among Brazilian firms
Guilherme Lerch Lunardi a,⁎, João Luiz Becker b, 1,
Antonio Carlos Gastaud Maçada b, 1, Pietro Cunha Dolci b, 1
a
b
Institute of Economics, Business and Accounting, Federal University of Rio Grande, Av. Itália km 8, Rio Grande, RS, 96201-900, Brazil
Management School, Federal University of Rio Grande do Sul, R. Washington Luiz 855, Porto Alegre, RS, 90.010-460, Brazil
a r t i c l e
i n f o
Article history:
Received 29 March 2010
Received in revised form 16 February 2013
Accepted 20 February 2013
Keywords:
Brazilian firms
Financial performance
IT governance
a b s t r a c t
Recently, there has been a great deal of interest on the part of many
organizations in the concept of IT governance in order to justify IT
investments. Some studies have shown that companies, which have
good IT governance models, generate higher returns on their IT
investments than their competitors. However, there is a lack of scientific
research confirming that effective IT governance leads to better financial
performance. In this paper, we attempt to determine whether companies
that have adopted IT governance mechanisms have improved their
financial performance, by measuring pre and post adoption performance
indicators. We found that companies that adopted IT governance practices
improved their performance when compared to the control group,
particularly in relation to profitability. Furthermore, we found that the
effects of adopting IT governance mechanisms on financial performance
were more pronounced in the year following adoption than in the year in
which they were adopted.
© 2013 Elsevier Inc. All rights reserved.
1. Introduction
IT governance has been treated as an important concern for businesses. The growing interest of
companies in the subject has been justified by the reflection of the changing role and relevance of IT within
organizations, and consequently, the need to ensure it is properly managed. IT governance applies
concepts borrowed from corporate governance to strategically drive and control IT, particularly in relation
⁎ Corresponding author. Tel.: +55 53 3293 5097.
E-mail addresses: gllunardi@furg.br (G.L. Lunardi), jlbecker@ea.ufrgs.br (J.L. Becker), acgmacada@ea.ufrgs.br (A.C.G. Maçada),
pcdolci@ea.ufrgs.br (P.C. Dolci).
1
Tel.: +55 51 3308 3536; fax: +55 51 3308 3991.
1467-0895/$ – see front matter © 2013 Elsevier Inc. All rights reserved.
http://dx.doi.org/10.1016/j.accinf.2013.02.001
G.L. Lunardi et al. / International Journal of Accounting Information Systems 15 (2014) 66–81
67
to two key-issues: the value IT delivers to an organization, and the control and mitigation of IT-related
risks (Peterson, 2004; Hardy, 2006). Most of its rules are based on common sense, standardization,
experience, and best practices which are defined in order to ensure that the IT-function is carried out
efficiently and effectively (Verhoef, 2007). IT governance arrangements encompass mechanisms that
enable business and IT executives to formulate policies and procedures, implement them in specific
applications, and monitor outcomes (Weill and Broadbent, 1998).
Some studies have shown that companies with good IT governance models present superior returns on
their IT investments than their competitors, especially because they make better IT decisions (Weill, 2004;
Weill and Ross, 2004). Committees, budgeting and approval processes, and participation of IT area in
strategy development are a few of the IT governance mechanisms that encourage behavior consistent with
the organization's mission, strategy, values, norms, and culture (Weill and Ross, 2004). Several cases of
successful IT governance have been reported lately, especially in business magazines like Computerworld,
CIO, and Informationweek. However, there is insufficient scientific research to confirm the effectiveness of
IT governance in the achievement of better financial performance.
In previous research, different types of IT governance have been proposed (e.g., Brown and Grant,
2005; Sambamurthy and Zmud, 1999; Weill, 2004); however, it is still not clear how different governance
types affect firm performance (Liang et al., 2011). Moreover, there are some studies measuring the effect
of IT governance on performance (Weill and Ross, 2005; Lazic et al., 2011; Liang et al., 2011) although it
cannot be concluded that superior IT governance performance leads to superior financial performance.
Although the available studies are not conclusive, they provide important evidences about the relevance of
IT governance to organizational performance. This research is motivated by the evident need for further
studies into the impact of IT governance, especially because besides the costs involved in acquiring
and maintaining an IT infrastructure, companies spend a great deal of money on consultancy services,
certifications, training, and specific software for IT governance.
A country that has been highlighted in the world scenario is Brazil because it is experiencing the fastest
economic growth in almost two decades (Businessweek, 2010). Moreover, according to Forbes (2012),
some companies from Brazil, Colombia and the Netherlands gained presence on its list this year. Brazilian
companies such as Petrobras, Banco Bradesco, Banco Itau, Banco do Brasil and Vale are ranked in top 55
world's biggest companies, and IT governance has been promoted by these companies in their institutional
reports as good IT management implemented practices. IT governance has been pointed out in a series of
articles and research – published, mostly in trade magazines (cf. Computerworld, 2006, 2007, 2009) – as a
key priority for Brazilian companies today, following an international trend and highlighting this theme as
an important research topic on Information Systems (IS) area.
With the aim of better understanding the effects of IT governance on organizational performance, we
verified whether companies that adopted IT governance mechanisms have improved their financial
performance since doing so. The study was carried out among the biggest Brazilian listed companies on
the Sao Paulo Stock Exchange (BOVESPA) – the main Brazilian stock exchange – comparing the evolution
of different performance indicators from companies which have formally adopted IT governance
mechanisms against those of other companies in their respective industries. In this context, the term IT
governance adopters refers to firms which have developed their own IT governance arrangements or
those driven by frameworks like COBIT and ITIL. This kind of research is intended to be of use to both
academics and practitioners who wish to identify the different benefits of IT and its management, serving
as a guide to drive IT strategies. In this paper we contribute to the literature by analyzing the adoption of IT
governance mechanisms as a key enabler and success factor for business performance itself.
2. Literature review
As IT becomes more important to organizations, new challenges naturally emerge in relation to its
management. In recent years, companies have been spending about 50% of all capital investment on IT
(Maizlish and Handler, 2005; Bloem et al., 2006); however, it has been very hard to see the real impact of
these investments on organizational performance. Estimated statistics published by IDC Brazil (IDC, 2010)
reveal that more than US$ 50 billion were spent on IT by Brazilian companies in 2010, surpassing the
amount spent in 2009 by almost 7%.
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G.L. Lunardi et al. / International Journal of Accounting Information Systems 15 (2014) 66–81
Although many organizations realize IT increasingly represents not only a significant expense but
also one of their main organizational assets, decisions regarding IT adoption, implementation, and
management are still complex and lot of money is wasted on bad IT acquisitions (Jeffery and Leliveld,
2004; McAfee, 2004). According to Maizlish and Handler (2005), 72% of IT projects were late, over budget,
lacked functionality, or never delivered; of the “successful” projects (28%), 45% were over budget and 68%
took longer than planned. Furthermore, they reveal that 50% of managers said they could have achieved
the same results at 50% of the cost, and only 52% of the projects resulted in increased strategic value. These
numbers are particularly alarming because IT projects and initiatives are supposed to boost growth,
modernization, and organizational competitiveness.
Most executives know it is impossible not to spend on IT; however, they do not want to spend any
more than the minimum necessary to deploy and run IT efficiently (Marchand, 2005). Defining the
amount of money to invest and how best to distribute the investment, in terms of maintenance, services,
human resources, or new projects is of great importance. Today, IT is considered one of the main risk
factors in organizations (Van Grembergen et al., 2004), and both lack and excess of such investments can
compromise the structure and the operations of the firm. Since IT has become crucial to the support,
sustainability and growth of the business, this pervasive use of technology has created a critical dependency
on IT that calls for a specific focus on IT governance (Haes and Grembergen, 2008). With IT investments
making up a significant portion of corporate budgets and increased external pressure to control and monitor
costs, effective IT governance is seen as a vital way to ensure returns on IT investments and improved
organizational performance (Jacobson, 2009). Concern about how IT and investments in IT are managed has
led executives to recognize that “getting IT right” this time will not be about technology, but about the way IT
is governed (Peterson, 2004). We know it is not the presence of IT by itself that guarantees returns, but the
way in which it is used and managed by firms. Nevertheless, defining the way IT should be organized and
structured has become one of the most enduring problems faced by organizations (Schwarz and Hirschheim,
2003), and differences in this regard can go a long way towards explaining why firms employing the same
technology sometimes obtain very different results.
The emergence of different mechanisms like balanced scorecards, business cases, software development
programs, the initiation of IT-review boards, and other performance indicators shows that corporate
executives want more insight and information about the IT-function in the organization (Verhoef, 2007). This
demonstrates the huge potential of IT governance and more specifically its mechanisms related with
organizational capacity exercised by the board, executive and IT (Van Grembergen, 2002), sharing decision
rights about IT and monitoring (Weill and Vitale, 2002), authority for core IT activities (Sambamurthy
and Zmud, 2000) and responsibility (Brown and Magill, 1994) to improve IT management and its use by
executives. Thus, the following definition of IT governance is used in this paper: IT Governance is the system
by which an organization's IT is directed and controlled; it describes the distribution of IT decision-making
rights and responsibilities among different stakeholders in the organization, and the rules and procedures
for making and monitoring decisions on strategic IT concerns (Peterson, 2004).
There is a sensitive difference between IT management and IT governance. IT management is focused
on the internal effective supply of IT services and products and the management of present IT operations.
IT governance in turn is much broader, and concentrates on performing and transforming IT to meet
present and future demands of the business (internal focus) and the business' customers (external focus)
(Van Grembergen et al., 2004). IT governance also involves all organizational issues regarding IT — like
definition of policies, IT decision-making rights and responsibilities, investment and projects approval,
maintenance and monitoring of all existent IT, IT delivery value evaluation, and so on. According to Van
Grembergen et al. (2004), IT governance can be deployed using a mix of structures, processes, and relational
mechanisms (see Fig. 1). These mechanisms are not necessarily adopted and used by all organizations.
Depending on the nature of the firm or business, for example, different configurations can be developed for
every organization. Determining the right mechanisms to adopt is a complex endeavor and it should be
recognized that what strategically works for one company does not necessarily work for another (Patel,
2004), even if they operate in the same industry.
The adoption of these mechanisms can help organizations to both mitigate the risks associated with IT
and create IT business value; nevertheless, many companies lack even the most basic rules, fail to
periodically adjust and align the IT budget with business needs, and do not use benchmarking or metrics
except for finance, which will certainly affect organizational performance (Verhoef, 2007). Executives are
G.L. Lunardi et al. / International Journal of Accounting Information Systems 15 (2014) 66–81
Structures
- roles and responsibilities
- IT strategy committees
- IT steering committees
- IT organization structure
- CIO on Board
- project steering
committees
- e-business advisory board
- e-business task force
Processes
- Balanced (IT) scorecards
- Strategic information systems
planning
- COBIT and ITIL
- Service Level Agreements
- Information economics
- Strategic alignment model
- business/IT alignment models
- IT governance maturity models
69
Relational Mechanisms
- active participation by principle
stakeholders
- collaboration between principle
stakeholders
- partnership rewards and incentives
- business/IT collocation
- shared understanding of business/IT
objectives
- active conflict resolution
- cross-functional business/IT training
- cross-functional business/IT job
rotation
Fig. 1. Structures, processes and relational mechanisms for IT governance.
dissatisfied with the way decisions and projects related to IT have been executed and justified, which has
encouraged researchers, practitioners and even consultants to propose models and frameworks to develop
and facilitate IT governance. Still, researchers have been unanimous that a universal best IT governance
structure does not exist, since a solution for a given firm is contingent on a variety of factors (Ribbers et al.,
2002; Weill and Ross, 2004; Brown and Grant, 2005).
There are some signs that the adoption of IT governance mechanisms can lead organizations to manage
and use the technology they apply to business more efficiently than companies in which IT governance is
not effective, and that this is reflected in the overall performance of the organization. The adoption of IT
governance would have direct and indirect effects on business processes which together determine the
overall performance of the firm (Dehning and Richardson, 2002). This belief leads to the first hypothesis
described as follows.
Hypothesis 1. Firms that formally adopt IT governance models will have improved their performance.
The critical role of IT in enterprises has led important evidences about the relevance of IT governance to
organizational performance. A good IT governance is important to develop: (1) trust and transparency
among the stakeholders, (2) a better way to deliver results through IT projects, and (3) desirable behavior
in using IT in alignment with organizational priorities and strategies (Weill and Ross, 2004; Broadbent and
Kitzis, 2005), which will enhance the value of IT and its impact on business performance.
One of reasons for investing in effective IT governance is to increase profitability. Companies expect to
have some positive impact on profits when they invest on IT, achieving both revenue growth and cost
savings (Mithas et al., 2012). IT governance objectives are focused on cost containment (including
efficiency, standardization, and automation) and risk reduction (including compliance, security, and
public scrutiny of IT failures). Moreover, some firms have learned how to make use of IT to boost
profitability through the positive effects of customer loyalty, cross-selling, and reduced marketing and
selling costs (Mithas et al., 2005), which could be enhanced with an effective IT governance (Weill and
Ross, 2005). Thus, it is expected that firms with effective IT governance would exhibit better profitability
measures than other firms in their respective industries.
There are some studies analyzing the relationship between IT governance and productivity (Weill and
Ross, 2005; Liang et al., 2011). IT can help firms reduce or avoid operational, administrative and marketing
costs. The deployment of IT systems has improved the efficiency of operational and supply chain processes
within and across firms by supporting lean transformational efforts (Ilebrand et al., 2010), besides
reducing inventory and cycle times. IT governance contributes to ensure effective IT services delivery
strategy to business segments that lead to internal productivity gains, reviewing current organization
structures and capability and implementing cost savings to improve efficiency and effectiveness (Patel,
2004). IT governance helps create an effective and productive IT environment that is seen to be adding
value to the organization (Haes and Grembergen, 2008). In this sense, it is expected that firms with
effective IT governance would exhibit better productivity measures than other firms in their respective
industries.
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G.L. Lunardi et al. / International Journal of Accounting Information Systems 15 (2014) 66–81
IT governance further supports and facilitates the organizational growth (Weill and Ross, 2004). IT
investments allow firms to create new value propositions to better meet needs and develop new offerings
for customers (Mithas et al., 2012). It enables firms to develop new marketing and sales channels to
promote awareness of their product/service offerings to existing customers and to attract new customers;
furthermore, the operational and customer-facing facets of IT capability are integrated and interdependent
with built-in feedback mechanisms, allowing for continual process improvements and organizational
learning. If investments in IT can foster growth either directly or indirectly through effective IT governance,
then it is expected that firms with effective IT governance would exhibit better market measures than other
firms in their respective industries.
To test Hypothesis 1, we examine three dimensions of firm performance. First, we examine the impact
of IT governance mechanisms' adoption on profitability (H1a). Second, we examine the impact of IT
governance mechanisms' adoption on productivity (H1b); and then we examine the impact of IT
governance mechanisms' adoption on profitability (H1c). Consequently, we hypothesize as follows.
Hypothesis 1a. Firms that formally adopt IT governance models will have improved their profitability
measures.
Hypothesis 1b. Firms that formally adopt IT governance models will have improved their productivity
measures.
Hypothesis 1c. Firms that formally adopt IT governance models will have improved their market
measures.
These effects, however, may take some time to appear; especially because implementing IT projects is
invariably a lengthy process (Lee and Kim, 2006). Depending on the size and complexity of the IT
implementation, the true benefits might only be seen after a few months, and in some cases even years
(Devaraj and Kohli, 2003). In a long-term examination of differences between ERP-adopters and
non-adopters, Nicolaou (2004) found that a lag of at least 2 years was necessary before adopters would begin
to demonstrate positive differential financial performance in comparison to the control group. Regarding to IT
governance, Haes and Grembergen (2008) compared different organizations and determined that, in general,
the high performers have more mature IT governance structures and processes. In essence, higher levels of IT
governance maturity are clearly linked to higher levels of organizational performance, as measured by a
group of metrics that gauge the success of governance practices. Therefore, in order to provide more concrete,
consistent, and significant results, this time lag must be taken into account when attempting to assess the
benefits obtained with IT governance, since some benefits will have short-term impacts and others will have
longer-term impacts. Then, we propose the following hypothesis:
Hypothesis 2. The impact of adopting IT governance models on performance is expected to become
stronger in the year following adoption than in the year of adoption.
3. Research methodology
In order to verify the impact of adopting IT governance mechanisms on financial performance, we
followed the event-study methodology. Briefly, an event study compares the performance of a group of
firms that have undergone a particular event (in our case, the adoption of IT governance models) with the
performance of a comparable group of firms that did not undergo that event.
We used the event study method in order to verify if companies, in the same economic sector, formally
engaged in the development of practices related to IT governance have a better evolution than companies
that do not use. According to McWilliams and Siegel (1997), this method is a powerful tool that can help
researchers assess the financial impact of changes in corporate policy. This method has been used
extensively in Accounting and Finance, often to measure the impact of corporate control changes (such as
dividend announcement, mergers, acquisitions, etc.). In Management, the framework has been used to
judge the effects of endogenous corporate events (such as CEO turnover and strategic investment
decisions) and exogenous events (the enactment of major legislation for example). More specific, in
Information Systems field, the main studies using event studies aim to verify the impact of the IT
G.L. Lunardi et al. / International Journal of Accounting Information Systems 15 (2014) 66–81
71
investment announcement on stock prices, e-commerce initiatives, ERP implementation, outsourcing
decisions, on security attacks (hackers and damages on services) and on supply chain management
systems adoption (Smith et al., 1998; Im et al., 2001; Dehning et al., 2003; Nicolaou, 2004; Dehning et al.,
2007).
Studies that used this methodology followed two different approaches: one based on stock process and
other based on operational performance. The first is most used and has the basic premise measure the
abnormal returns, in a certain time, associated a specific released event. The second observes different
financial indicators to evaluate the efficiency of analyzed companies in a certain time, using the frequency
of a given effect (Guzman, 2002). In this study, we choose the second approach because the impact of the
adoption of IT governance is not immediate, and so, caused a little or none influence in the stock value of
an organization after the disclosure of such information.
According to Mackinlay (1997), an event study follows a general flow of analyses: identification of the
event of interest and the event window, definition of the sample selection criteria, selection of abnormal
and normal returns measurement criteria, and calculation of the abnormal returns. The following sections
detail the procedures used in this study.
3.1. Identification of the event of interest and the event window
The first step of this methodology is to define the event to be studied and identify the relevant date of
this event (year zero). From this information, the researcher defines the event window (Fig. 2). This
window embraces the period which the performance of the companies should be analyzed. According
to Vidal and Camargos (2003), the event window should take into account the moments considered
important to verify if there is or not abnormal returns for the analyzed measures. However, this window
should not be so wide because the interference of other events could be incorporated in the analysis and
so influence the conclusions of the study. In this research, we defined an event window that was centered
on the IT governance adoption year (defined as the period when companies formally started to implement
their IT governance model, either through an own model or driven by the adoption of reference guides or
frameworks such as COBIT and ITIL) — called year zero (t = 0). Estimation and comparison windows were
defined as 1 year before and 1 year after the IT governance adoption, respectively.
3.2. Definition of the sample selection criteria
After defining the event, it is necessary to determine the selection criteria for including firms in the
sample. The sample universe was defined as being all Brazilian companies listed on the São Paulo Stock
Exchange (BOVESPA), totaling 405 firms. This choice considers the fact that these companies are obligated
by law to publish periodically to the public their balance sheets, and they must have a specific communication sector with their shareholders and the general public, which facilitated the contact and access.
nce
verna
IT go tion (t)
Adop
mance
Perfor )
(t-1
(Estimation window)
L1
ce
rman
Perfo +1 ). . .
(t), (t
(Event window)
(Comparison window)
L2
L3
t
T0
T1
0
T2
T3
Fig. 2. Event study. Where: t = 0: event date; L1 = estimation window; L2 = event window; L3 = comparison window.
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G.L. Lunardi et al. / International Journal of Accounting Information Systems 15 (2014) 66–81
To identify the companies formally engaged in IT governance practices, two distinct strategies were
used:
• search and analysis of electronic press releases (such as announcements, interviews, articles, cases,
institutional websites, etc.), identifying the company's name, the IT governance mechanisms adopted,
and the exact time period the IT governance process began. We use terms like “IT governance,” “COBIT,” “ITIL,”
“practices,” “mechanisms,” “adoption,” and “SOX,” identifying 53 companies.
• e-mails were sent to the Investors Relations department of all Brazilian companies listed on BOVESPA,
asking to the CIO if they were implementing IT governance mechanisms, and if so, which ones, and the
exact implementation period, identifying 48 companies.
After that, 101 companies were identified as formally implementing IT governance. Of these
companies, fourteen were excluded from the analysis. Six of them because their IT governance process
had started after August 2006, making it impossible to evaluate the impact of adopting the IT governance
mechanisms on performance because data collection was completed in March 2007; another six
companies were excluded because their financial data were not available in the consulted database and,
finally, two more companies were excluded because they had experienced another significant event,
which could confound the results, during the analyzed period. It should be emphasized that the data used
in the analysis relate not only to year zero but covers the period including 1 year before and 1 year after
the adoption of IT governance, both for companies that underwent this event and the group of comparable
firms that did not undergo the event.
The performance measures were chosen in consultation with five specialists in Accounting, Economics,
and Finance. They suggested eight different performance measures which were separated and grouped
according their purpose. The suggested measures have been used in several earlier studies evaluating the
impact of IT on organizational performance (see Lee and Kim, 2006). The performance measures were
classified into three groups:
• profitability measures: return on equity (ROE), return on assets (ROA), and profit margin (PM);
• productivity measures: asset turnover (AT), operating margin (OM), and operating expense to sales
(OS); and
• market measures: sales growth (SG), and share repurchase (SR).
After selecting firms and performance measures, we proceed to data collection. All the data required to
calculate the metrics were collected from Economatica Tools for Investment. The statistics employed in
event studies tend to be very sensitive to outliers, especially with small samples (McWilliams and Siegel,
1997). To reduce the influence of outliers, all performance measures were winsorized at ± 3 standard
deviations. Winsorization has often been used in Economics and Finance studies to control potential
outliers (Durnev and Kim, 2005; Black et al., 2006). This procedure trims the extreme values (lower and
upper), replacing them by the two remaining extreme values, instead of throwing them away.
Winsorization therefore tends to stabilize the variance of a normal population from an overall distribution
contaminated by a small proportion of abnormal values (Tyler, 1991). Each metric was calculated both
for those companies which had adopted or were adopting IT governance mechanisms and those in the
corresponding control group. In a few cases, some companies lacked the data necessary to calculate
some metrics, resulting in different sample sizes for some empirical tests (better discussed in the results
section).
3.3. Calculation of the abnormal returns
The last procedure of an event study involves the selection of normal and abnormal measurement
criteria. According to Campbell et al. (1997), the abnormal return is the actual ex post return of the
measure over the event window minus the expected return of the company over the event window. The
normal return is defined as the return that would be expected if the event had not taken place. This stage
consists in calculating the performance measures in order to verify the presence of abnormal returns.
Eq. (1) exemplifies the calculation of the performance measures. The change in the industry mean (the
sum of companies from the same industry which did not formally adopt IT governance mechanisms) over
G.L. Lunardi et al. / International Journal of Accounting Information Systems 15 (2014) 66–81
73
the same period was subtracted from the change in each performance measure to remove industry and
economy-wide effects. We use the industry sector as a comparison group, which reduces the macroeconomic effects that can positively or negatively influence the companies in the same sector (such as
gains from an increase in demand, where all companies from a specific sector should benefit, or a loss
which has an effect on all companies that are part of the affected sectors). Thus, the industry mean thus
serves as a benchmark that increases the meaningfulness of the resultant performance measures.
ðROAfirm:post−ROAfirm:preÞ−ðROAindustry:post−ROAindustry:preÞ
ð1Þ
Where:
ROAfirm.post ROA after IT governance adoption
ROAfirm.pre ROA before IT governance adoption (t – 1)
ROAindustry.post Industry average ROA after IT governance adoption
ROAindustry.pre Industry average ROA before IT governance adoption (t – 1)
The result is that observed changes in financial performance can be attributed to the adoption of IT
governance mechanisms rather than to industry wide effects. A similar equation was done for each
performance measure (ROA, ROE, PM, AT, OM, OS, SG, and SR). The Student's t-test was then applied to
determine whether the means representing the performance changes were significantly different from
zero between the two distinct groups. Changes in performance were tested for the year prior to a firm's
adoption of IT governance mechanisms as well as for the year in which IT governance was adopted (from
year − 1 to year 0) and the year following adoption (from − 1 to year + 1). This device helps to identify
any possible time-lag effects (Lee and Kim, 2006) in the impact of IT governance mechanisms on
performance of organizations, particularly because some benefits of IT can have almost immediate
impacts, while others will take effect only in the medium and the long term (Devaraj and Kohli, 2000; Hu
and Plant, 2001; Dedrick et al., 2003). Following traditional nomenclature, year 0 is defined as the year the
firm begins actual implementation of the IT governance. Year − 1 is the year before implementation began
and year + 1 is the year after implementation began. Thus for some firms in the sample, year 0 is 2004, for
others 2005, and so forth for the period 2001–2006 as shown in Table 1.
4. Results
We identified 101 (25%) Brazilian companies which had formally adopted IT governance mechanisms.
Most of the IT governance adoptions in the sample occurred in 2004–2005 (68 firms or 67.3%), showing
that IT governance is a recent movement among Brazilian publicly traded firms (Table 1). One explanation
for the large number of Brazilian firms introducing the IT governance process in this period might be their
efforts to adapt their internal controls to conform to the requirements of the Sarbanes Oxley Act, which are
obligatory for companies that negotiate shares on the New York Stock Exchange (NYSE) — the initial
deadline for foreign companies was December 2006.
Table 1
Distribution of IT governance adoption sample firms by year.
Year
Frequency
Percent
2001
2002
2003
2004
2005
2006
2007a
Total
1
7
9
26
42
12
4
101
1.0
6.9
8.9
25.7
41.6
11.9
4.0
100
a
Data Collection End-date: March 2007.
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G.L. Lunardi et al. / International Journal of Accounting Information Systems 15 (2014) 66–81
The companies that formally adopted IT governance mechanisms are distributed in 29 different
industries according to BOVESPA's classification (Table 2). The highest concentration is in banks (13
firms), and electric utilities (10), followed by mining and steel (8), fixed line communications (7), and
food manufacturing (6). Industries like personal care and tobacco were not included in the analysis
because it was not possible to make comparisons between “adopters” and “non-adopters.”
Most common IT governance mechanisms were adopted by those 101 Brazilian firms. A total of 23
different IT governance mechanisms were indicated by them (see Fig. 3). It can be seen that COBIT
(Control Objectives for Information and Related Technology) and ITIL (Information Technology
Infrastructure Library) are the IT governance drivers most frequently cited by the studied companies.
Developed specifically for the management of IT infrastructure, many companies indicated that they use
these two models as guides for the implementation of IT governance. While COBIT emphasizes the control
of different processes in four large domains (planning and organization, acquisition and implementation,
delivery and support, and monitoring), ITIL includes a set of recommendations divided into two blocks:
Service Support and Service Delivery, focusing on managing IT infrastructure so as to ensure the service
levels are grouped with the internal and external clients.
Developed by the IT Governance Institute, COBIT is designed specifically for the control of IT, helping
organizations to align the use of technology with their corporate objectives. It is used in the IT field as an
umbrella for various methodologies and leading practices indicated for the management of IT. ITIL, on the
other hand, has gained note as a specific model for the IT area, containing a set of leading practices for the
management of technology infrastructure. It facilitates the identification of the maturity of the processes,
how to improve them and, as a consequence, offers parameters for a company to compare its performance
Table 2
Distribution of sample firms according to BOVESPA's classification.
Industry
BOVESPA listed firms
IT governance adopters
Percent
Banking
Electric utilities
Mining and steel
Fixed line communications
Food industry
Chemicals
Wireless communications
Iron and steel products
Oil, gas and biodiesel
Leasing
Construction
Wood and paper
Insurance
Textiles/apparel/footwear
Airlines
Machines and equipments
Information Technology
Retail/diversified retailers
Gas utilities
Packaging
Health
Water utilities
Media
Personal care
Railroads
Retail and distribution
Toll roads and highways
Transportation equipment
Tobacco
Other industries
Total
28
47
14
12
22
15
7
14
7
5
19
9
6
27
5
14
7
10
3
4
6
5
4
1
4
4
10
11
1
84
405a
13
10
8
7
6
5
5
4
4
4
4
4
3
3
2
2
3
2
2
1
1
1
1
1
1
1
1
1
1
0
101
46
21
57
58
27
33
71
29
57
80
21
44
50
11
40
14
43
20
67
25
17
20
25
100
25
25
10
9
100
0
25%
a
According to Classificação Setorial BOVESPA, published in 04/04/2007, 405 firms were listed on BOVESPA; in some industries no
firms had adopted IT governance.
G.L. Lunardi et al. / International Journal of Accounting Information Systems 15 (2014) 66–81
COBIT
54%
ITIL
44%
SOX
36%
Internal Solution
32%
BS7799/ISO17799
27%
PMI
23%
SLA/SLM
18%
IT Steering Committee
15%
Pos Implementation Review
12%
BSC / IT BSC
10%
Strategic Information Systems Planning
7%
Effective communication
7%
SEI Maturity Model
ROI / business evaluation
Internet Portal
75
6%
5%
4%
Others
27%
Fig. 3. IT governance mechanisms.
with others in the same segment. It has also been noted that a large number of companies that have
adopted various guidelines from both models in order to be compliant with the requirements of SOX.
The second group of practices focused on conforming to SOX (36%) and the use of their own IT
governance models (32%), which are supported by some of the framework practices that are well
established in the market, such as COBIT, ITIL, BS7799, COSO, etc. As more senior management is responsible for
ensuring that the published financial information is accurate, IT has become a critical issue, especially because
modern accounting systems are based on technology and the reliability of financial reports depends on the
existence of safe and trustworthy computational environments, hence, the justification for the information
security guidelines, such as BS7799, ISO17799 and ISO27001.
With regard to the employment of their own models of IT governance, there is a growing tendency
towards using a combination of practices and guidelines from different frameworks, so as to obtain the
benefits of each of them without necessarily incorporating details that are not relevant. These models tend
to be made up of other mechanisms, involving the management of projects, the elaboration of service level
agreements and their monitoring, the IT committees, as well as the use of post-implementation evaluation
methods (all indicated in the literature as important IT governance mechanisms).
Among those mechanisms that are less frequently mentioned – listed as “Others” – are: COSO
(Committee of Sponsoring Organizations); the IT service catalog; shared domain knowledge; Six Sigma;
SOA (Service Oriented Architecture); the IT project-linked compensation practices; BPM (Business Process
Management); ISO9000; and the definition of roles and responsibilities.
76
G.L. Lunardi et al. / International Journal of Accounting Information Systems 15 (2014) 66–81
Table 3
Comparisons of profitability measures.
Longitudinal analysis
Year zero (t = 0)
Measure
Non-IT governance adopters
IT governance adopters
t−1
t
diff.
t−1
t
diff.
78
72
73
2.73
11.97
6.17
2.28
10.01
5.08
−0.45
−1.96
−1.09
4.35
18.54
7.39
5.23
15.63
8.58
0.88
−2.91
1.19
Measure
n
Non-IT governance adopters
IT governance adopters
t−1
t+1
diff.
t−1
t+1
Return on assets — ROA
Return on equity — ROE
Profit margin — PM
66
63
65
2.18
10.15
5.18
1.33
6.22
3.96
−0.85
−3.93
−1.22
4.11
17.61
7.48
5.27
18.34
9.48
Return on assets — ROA
Return on equity — ROE
Profit margin — PM
n
p
.038
.586
.035
Year 1 (t + 1)
p
diff.
1.16
0.73
2.0
.01
.043
.006
Following the sample description and the most common IT governance mechanisms adopted by
Brazilian firms listed at BOVESPA, we proceed to the event study. Initially, we analyzed the profitability
measures — ROA, ROE, and PM (Table 3). Results for ROA indicated that firms which had formally adopted
IT governance mechanisms experienced significant improvements in performance (p b .05) in both
analyzed years, 2 when compared to other firms. It can be seen that the lag effect of the adoption of IT
governance mechanisms is significantly greater than the immediate effect (the p value is closer to zero
in year 1). This fact shows that firms improve as their IT governance mechanisms mature. ROA measures
the overall effectiveness in generating profits with available assets (Gitman, 2005). As a rule, the higher
the ROA, the more profitable the company is. According to Weill and Woodham (2002), top performers, as
measured by ROA, are heavy users of IT councils, capital investment processes, service level agreements,
chargeback practices, and process teams. All of these mechanisms are used to maximize the value derived
from the firm's assets by reuse, standardization, clear agreements and financial discipline. The difference
between the number of companies in “year 0” (n = 78) and in “year 1” (n = 66) occurs because some
of them have started their IT governance process too recently, not allowing them to be analyzed in the
“year 1” period because data collection was finished in 2007. This difference occurred in all performance
measurements.
When analyzing ROE, we only identified significant improvements in the performance of companies
which had adopted IT governance mechanisms in the year following adoption (year 1). In this case, we
were unable to find an immediate effect of the adoption of IT governance mechanisms. However, in the
year following adoption, among the IT governance adopters the ROE increased 0.73, while among the
non-adopters there was a considerable reduction (− 3.93) in the same period. This measure is considered
one of the most important profitability measures for a firm, because it assesses the return to the firm's
stockholders by relating profits to shareholder equity (Gitman, 2005). ROE captures, in a single ratio, the
degree to which a firm is successful in managing its assets, operations, and capital structure. According to
Weill and Ross (2004), top performers, as measured by ROE, tend to take a centralized approach towards
IT governance, using committees (for cost control, and IT standardization), and formal postimplementation assessment of IT-related projects.
Regarding PM, we found both an immediate effect and a time-lag effect (p = .024; p = .006) of the
adoption of IT governance mechanisms on performance. As with the other measures (ROA and ROE), the
evolution of PM was greater in year 1. This measure is the “bottom line” of operations. It indicates the rate
of profit from sales and other revenues. Because it moves with costs, it also reveals the type of control
management has over the cost structure of the firm (Gitman, 2005). The adoption of different IT
2
To compare the different means between IT governance and non-IT governance firms, we compared the evolution of the
performance measures in both analyzed periods (c.f. ROA, “−0.45” against “0.88” and “−0.85” against “1.16”).
G.L. Lunardi et al. / International Journal of Accounting Information Systems 15 (2014) 66–81
77
governance mechanisms like definition of IT decisions, IT metrics, and IT standardization provides a degree
of professionalism to IT decisions and a new economic view of IT — focused especially on business value. In
addition, the focus on risks and prioritization of IT projects helps to define costs and benefits of IT, avoiding
any unnecessary waste of money (Bloem et al., 2006). Comparison of the results for profitability measures
indicated significant differences between the performance of IT governance mechanisms adopters and
that of the control group in both years. We also noted that firms which had adopted IT governance
mechanisms significantly improved their performance over time, especially as their IT governance
practices became more mature. Previous research has shown similar results regarding the impacts of IT on
performance (Dedrick et al., 2003).
Next, we analyze the productivity measures — OM, AT, and OS (Table 4). For OM, we were unable to
find any evidence for either year that IT governance mechanism adopters had improved their relative
performance. OM measures the percentage of each dollar from sales that remains after all expenses
associated with producing, selling, and operating. Many analysts use the operating margin to gauge the
profitability of a company's operations. Interest expenses and taxes over which current management may
have no control are removed from the equation, thus giving a clearer indicator of management performance (Gitman, 2005).
IT governance mechanisms like COBIT and ITIL can help firms to monitor and control IT and IT services,
improving the IT infrastructure efficiency and the quality of internal, external and outsourced IT services.
These measures lead to a reduction in IT costs and, consequently, in the operating expenses of the
company. Nevertheless, it was not possible to statistically verify these benefits.
Regarding AT, we only found significant improvements in the performance of the firms that had
adopted IT governance mechanisms in the year following adoption (year 1). In the year zero, the evolution
of this measure was almost the same for both groups (p = 0.987). The asset turnover, also known as
“asset utilization ratio,” measures the ability of a firm's assets to generate revenue. It is used to measure
the degree to which a firm is efficient in using its assets to generate sales, so indicating whether or not the
firm's operations have been financially efficient (Gitman, 2005). Therefore, when a company adopts
mechanisms to increase the efficiency of its IT infrastructure (by monitoring or controlling it, reduction
of incidents, greater stability, and readiness of the systems) there will be an impact on its financial
performance.
When analyzing OS, we could not find any statistically significant difference between IT governance
adopters and the control group. Operating expenses include day-to-day expenses such as sales and
administration; thus, when a company adopts mechanisms to reduce IT costs, reuse or standardize the IT
infrastructure, the operating expenses will be affected, improving this measure. As with the OM, it was not
possible to statistically verify these benefits in the analyzed period. Generally, the results obtained for the
productivity measures did not indicate any statistical difference between firms which had adopted IT
Table 4
Comparison of productivity measures.
Longitudinal analysis
Year zero (t = 0)
Measure
n
Operating margin — OM
Asset turnover — AT
Operating expense to sales — OS
69
68
76
Non-IT governance adopters
IT governance adopters
p
t−1
t
diff.
t−1
t
diff.
14.76
0.61
19.78
14.07
0.63
19.47
−0.69
0.02
−0.31
18.07
0.67
19.31
17.85
0.68
17.79
−0.22
0.01
−1.52
.627
.987
.261
Year 1 (t + 1)
Measure
Operating margin — OM
Asset turnover — AT
Operating expense to sales — OS
n
57
63
64
Non-IT governance adopters
IT governance adopters
t−1
t+1
diff.
t−1
t+1
diff.
p
14.19
0.6
20.49
12.3
0.57
21.07
−1.86
−0.03
0.58
17.04
0.6
19.76
17.06
0.65
18.59
0.02
0.05
−1.17
.161
.026
.212
78
G.L. Lunardi et al. / International Journal of Accounting Information Systems 15 (2014) 66–81
governance mechanisms and the group non-adopters, except for AT in which there was significant
difference in the year following adoption (year 1). Apparently, IT governance adopters did not improve
their relative performance regarding operating profits and the relation between expenses and revenues.
Although this study has tried to consider simultaneously both the immediate and lag effects, the short
analytical period may mean that the real effects of the adoption of IT governance may have been missed
(Dedrick et al., 2003).
Regarding market measures (SG and SR), we did not identify any statistical difference between IT
governance adopters and the control group at the 5% level of confidence (Table 5). Even though sales
growth (SG) was seen to diminish for IT governance adopters at a lower rate than for the non-IT
governance adopters, it was not possible to statistically assert (p = 0.213 and p = 0.516) that IT
governance mechanisms improved sales potential. The fact that both groups experienced a drop in sales
during the analyzed period can be explained by economic stagnation or the entry of new competitors into
their respective sectors, indicating that firms tend to follow similar strategies (Ball and Brown, 1968).
Analysis of the results for share repurchase (SR) showed there was no statistical difference between IT
governance adopters and non-IT governance adopters (p = 0.337 and p = 0.443) in this aspect. We
found that IT governance benefits were not perceived by the market in either of the analyzed years (year
zero and year 1). Results for market measures did not show any statistically significant difference between
companies which had adopted IT governance mechanisms and the control group. We noted that IT
governance mechanisms have been used to generate efficiency within the firm, by establishing internal
controls to reduce costs, for example. When we analyzed efficacy measures – such as the sales growth –
we did not find significant gains, at least in the analyzed period (year zero and year 1). These results are
not totally unusual, since other researchers have found a significant positive relationship between IT
investment and several company performance measures, while not finding a positive impact on sales
growth (Hu and Plant, 2001; Lee and Kim, 2006). The insignificant stock price variation in the same
analyzed period demonstrates that the market did not perceive IT governance adoption as being capable of
improving organizational performance.
Therefore, we found that firms that had adopted IT governance mechanisms made gains in terms of
efficiency — used their IT resources better, or controlled their IT investments better. However, the adoption
of those mechanisms did not provide the companies with advantages in the market. Maybe, more effective
communication of the benefits of IT governance would make the market perceive the efforts made by firms to
improve their IT management and, consequently, their organizational performance.
As a whole, we find general support for Hypothesis 1, particularly in relation to profitability
(Hypothesis 1a). Companies that adopted IT governance practices improved their profitability when
compared to the control group, in all three evaluated measures (ROA, ROE and PM). Hypothesis 1b and 1c,
however, could not be supported. We only found significant improvements of the firms that had adopted
IT governance mechanisms in the asset turnover measure (AT) in the year following adoption. The other
measures were not statistically significant for both analyzed years.
Table 5
Comparison of market measures.
Longitudinal analysis
Year zero (t = 0)
Measure
Non-IT governance adopters
IT governance adopters
t−1
T
diff.
t−1
t
diff.
70
58
15.86
46.61
12.36
42.47
−3.50
−4.14
15.35
40.40
14.88
27.27
−0.47
−13.1
Measure
n
Non-IT governance adopters
IT governance adopters
t−1
t+1
diff.
t−1
t+1
Sales growth — SG
Share repurchase — SR
65
51
16.59
54.0
10.12
46.45
−6.47
−7.55
17.65
47.58
12.98
48.90
Sales growth — SG
Share repurchase — SR
n
p
.213
.337
Year 1 (t + 1)
p
diff.
−4.67
1.32
.516
.443
G.L. Lunardi et al. / International Journal of Accounting Information Systems 15 (2014) 66–81
79
Still, the results do indicate that the impact of IT governance on performance is stronger in the year
following adoption than in the year which IT governance model was formally adopted. We can speculate
that higher levels of IT governance maturity are linked to higher levels of performance, as measured by
performance metrics whose evolution was greater in year 1 than year zero. Therefore, Hypothesis 2 is
supported.
5. Final remarks
This research investigated the relationship between the adoption of IT governance and financial
performance in firms. We followed the event-study methodology, comparing the performance of a group
of firms which had adopted IT governance mechanisms with the performance of a group of comparable
firms that had not adopted IT governance mechanisms. Our analysis indicates that IT governance adopters
noticeably improved their organizational performance when compared to the control group, mainly in
relation to profitability measures (such as ROA, ROE and profit margin). It is particularly interesting to see
that the effect of IT governance mechanisms on ROE varied over time, only reaching statistical significance
1 year after the adoption of IT governance.
We also found that IT governance mechanisms have been used by firms essentially in order to create
greater efficiency, such as cost reduction or better IT infrastructure utilization, instead of achieving other
advantages, such as sales growth and higher stock prices. In fact, some studies reveal that Brazilian
executives are more likely to perceive the main benefits of IT as being related to operating processes rather
than strategic processes when compared to executives from other countries (Maçada and Becker, 2001).
This focus on cost related objectives indicates IT governance initiatives are not concentrated yet on
customer-centric business requirements that enable revenue and profit growth. As IT becomes a more
strategic business enabler, organizations should expand objectives to also include meeting strategic
business objectives, improve agility to meet changing business needs, and enable product and service
enhancements that improve competitive differentiation.
Another aspect of this study was that we identified a lagged effect, the lack of which some researchers
identified as one of the main limitations of studies analyzing the impact of IT investment (Devaraj and
Kohli, 2000; Dedrick et al., 2003). Hu and Plant (2001) have stressed the need to observe benefits from IT
investments or use over longer time, especially because some IT investments will have short-time effects
and others will have longer-term impacts (Dedrick et al., 2003). This research tried to consider
simultaneously both immediate and lagged effects in relation to the adoption of IT governance
mechanisms on financial performance. We noted that the impact of these mechanisms is enhanced over
time, that is, as IT governance mechanisms mature, the more expressive their benefits become. Therefore,
we can say that the impact of those mechanisms is not an isolated event, but a continuous phenomenon —
with the lag effects being greater than the immediate ones. Liang et al. (2011), analyzing the perception of
334 IT executives from mid- to large-sized firms in Taiwan, found that IT governance maturity enables
strategic alignment, which in turn yields better organizational performance.
This research has some implications for IS managers and academics. The article proposes the use of the
event-study method to evaluate the marginal effect of an event on financial performance. This method,
commonly used in Accounting and Finance studies, was shown to be applicable in IS studies as well. Its use
permitted the evaluation of a lagged IT effect – although the analysis was restricted to only 2 years –
identified as one of the main limitations affecting studies assessing the impacts of IT on organizational
performance. With regard to managerial contributions, we can highlight that we empirically found that
companies which have adopted formal IT governance mechanisms showed significant improvements on
organizational performance (especially on profitability measures), compared to companies from the same
industry which, in turn, had no such mechanisms. Results suggest that the adoption of IT governance
practices is associated to improvements in different financial metrics and maturity of IT governance
initiatives can affect the governance performance and, consequently, the organizational performance.
This study has some limitations. First, we considered only a two-year period of analysis, which would
appear to be too short period of time to identify the real benefits to be obtained from adopting IT
governance mechanisms. However, as seen in this study, the experience of Brazilian companies with IT
governance mechanisms is recent. Another limitation concerns the sample used in the study. Because the
empirical tests required at least 2 years of data in order to compare performance before and after the
80
G.L. Lunardi et al. / International Journal of Accounting Information Systems 15 (2014) 66–81
adoption of IT governance mechanisms, any firm which lacked the available data was eliminated from the
analysis. This limitation is essentially a factual limitation, not compromising the reliability of the statistical
tests. Another limitation of this research is that the adoption of IT governance was considered a binary
variable, thereby not distinguishing between different degrees to which IT governance mechanisms were
adopted, hence not allowing this distinction to be captured. In addition, we should be cautious about the
generalization of our findings, restricted to the Brazilian context.
We hope that these contributions prove useful to both scholars and executives striving to understand
the impact of implementing IT governance mechanisms. It might be useful to carry out further research in
order to identify the direct and indirect benefits provided by the IT governance mechanisms most
commonly adopted by firms (COBIT, ITIL, IT committees), showing the effects of these mechanisms on
business processes and overall firm performance. Finally, future research should analyze the impact of
adopting IT governance mechanisms over time (including more than 1 year post-adoption data).
Acknowledgments
This research was partially supported by the National Council for the Improvement of Higher Education —
CAPES, the National Council for Scientific and Technological Development — CNPq, and the State Research
Support Foundation of Rio Grande do Sul — FAPERGS, all Brazilian governmental agencies. We gratefully
acknowledge their support. We are also thankful to the Editor and the anonymous reviewers for their helpful
and constructive comments on earlier drafts of this paper.
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