Value Creation in the Knowledge-Based Economy

Abstract

Effective investment strategies help companies form dynamic core organizational capabilities allowing them to adapt and survive in today's rapidly changing knowledge-based economy. This dissertation investigates three valuation issues that challenge managers with respect to developing business-critical investment strategies that can have significant impacts on firm performance and growth in the competitive, information-orientated business environment. Using firm-level data collected from Taiwan, this dissertation examines specific valuation issues that are vital in shaping not only firm performance but also competitive advantages in current knowledge-based economy: (1) investments in information technology (IT), (2) human capital, and (3) corporate governance. To address these three major managerial challenges relating to firm investment strategies, this dissertation focuses on investigating the impact of three sources of business value creation, including IT investment, workforce education, and Chief Audit Executive (CAE) turnover. The results of investigating service infrastructure in the banking industry support the idea that in today's complex, fast moving multichannel business environment, evaluation of the strategic value of IT must consider both the direct impact of individual channels and the complementary relationships between IT-based channels and the traditional branch channel while constructing an effective business strategy to align IT use with firm strategic objectives. The interdependence between channels found in this study has a significant effect on firms' short term profitability and long term market competition capability, suggesting that the true value of IT will be fully realized only when coupled with complementary investments in organizational resources. Second, results of examining investments in workforce and research and development (R&D) activities in IT industries indicate that firms with more highly educated workforces have, on average, better performance. Investment in R&D for improving innovation capability is positively associated with firm performance. More importantly, higher levels of workforce education moderate the impact of R&D investment on firm performance, confirming the hypothesized interdependency between workforce education and firm innovation capabilities. In other words, firms benefit more from investment in R&D activities when they have a higher level of educated workforce. An important strategic implication from the DuPont Analysis is that the complementarity between workforce education and R&D capital reinforces a firm's differentiation strategy. Finally, the results of analyzing CAE turnover in Taiwan public companies show that CAE turnover is positively correlated with executive turnover (Chief Executive Officer [CEO] and Chief Financial Officer [CFO]) and financial restatements, which are commonly viewed as a signal of a troubled business or failure. The study also shows that CAE turnover has a negative impact on contemporaneous and future firm performance, suggesting that, to some extent, changing the head of the internal audit function conveys a negative signal to the market regarding a firm's performance. Given that the CAE monitors and assesses enterprise risk practices, the findings of this study suggest that CAE turnover could be used as an indicator of business volatility and potential business risk. The passage of the governance law which improves the quality of a firm's internal control system is found to reinforce the signaling role of CAE turnover and improve firm performance. The results of this dissertation provide important strategic insights regarding the factors managers should consider when making investment choices that are expected to align with a firm's long term development and performance. This dissertation complements literature in managerial accounting and information systems, particularly contributing to business value of IT investment, human capital, and internal audit research streams. It also addresses regulatory implications for policy makers such as regulating relevant disclosures of company information for interested parties and developing a regulatory environment that minimizes regulatory barriers which can suppress businesses and economy growth.