University of South Florida

ABSTRACT: The objective of this research is to examine how the capital market responds when a firm announces that it plans to implement an enterprise resource planning (ERP) system. This is the first study to investigate the extent to which ERP systems are deemed to add market value to business organizations. Study findings indicate an overall positive reaction to initial ERP announcements. Further analyses suggest that the reaction is most positive for small/healthy firms. Finally, the market response to larger ERP vendors, as reflected by PeopleSoft and SAP, is significantly more positive than to smaller ERP vendors.

Keywords: enterprise resource planning (ERP); event study; management information systems; accounting information systems.

Data Availability: Data is available from the authors upon request.

I. INTRODUCTION

Enterprise resource planning (ERP) systems allow business organizations to replace disparate computer systems with an integrated suite of applications, resulting in a seamless flow of information across the entity. ERP advocates argue that the net benefit of ERP systems becomes manifest in firms' increased financial performance and enhanced competitive position. However, precisely quantifying the extent to which ERP systems add value to firms is problematic due to the qualitative nature of many of the benefits derived from ERP implementations.

The costs associated with ERP implementations can be staggering. For instance, as of 1998 over 6,000 firms had implemented ERP packages supplied by SAP, just one of many ERP software suppliers, at an average implementation cost of $20 million (Cooke and Peterson 1998). When planning an implementation, it is difficult to get a firm grip on the cost side of the equation. In many cases, ERP implementation projects end up costing considerably more than initially budgeted due to a variety of underestimated and hidden costs, such as training, integration, testing, conversion, and consulting (Slater 1998). However, once the ERP system is online, implementation costs are relatively easy to quantify ex post. On the other hand, ERP system-related benefits are more difficult to assess either ex ante or ex post.

Acclaimed ERP benefits arise from increased firm efficiency and effectiveness. For example, efficiency gains can be realized from consolidating multiple data entry points, pushing decision-making authority down to lower organizational levels, reengineering operational processes, and automating business processes. In many instances, efficiency-related savings are quantifiable, as they are often reflected in lower labor and inventory expenditures. Effectiveness gains can be achieved in a variety of ways, such as increased customer resource management, improved product/service quality, and enhanced strategic-planning capability. The latter effectiveness indicator, improved strategic planning, is believed to be one of the greatest potential benefits offered by ER? systems.

Unfortunately, effectiveness gains are quite difficult to measure due to their qualitative nature, the length of time it takes to realize effectiveness-related gains, and the myriad ways in which effectiveness improvements become manifest. Accordingly, attempts to justify ERP systems using conventional return on investment (ROI) metrics usually fall short of expectations. For instance, Stedman (1999) reports the results of a survey conducted by Meta Group, Inc....