Shareholder wealth implications of software firms' transition to cloud computing: A marketing perspective

• Main Authors: NEZAMI, Mehdi, TULI, Kapil R., DUTTA, Shantanu
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2022
• Subjects: Cloud ratio; Excess stock returns; Idiosyncratic risk; Market maturity; Advertising intensity; E-Commerce; Marketing; Strategic Management Policy
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6956; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7955/viewcontent/ShareholderWealthImplications_pvoa.pdf
• Institution: Singapore Management University

Moving into cloud computing represents a major marketing shift because it replaces on-premises offerings requiring large, up-front payments with hosted computing resources made available on-demand on a pay-per-use pricing scheme. However, little is known about the effect of this shift on cloud vendors' financial performance. This study draws on a longitudinal data set of 435 publicly listed business-to-business (B2B) firms within the computer software and services industries to investigate, from the vendors' perspective, the shareholder wealth effect of transitioning to the cloud. Using a value relevance model, we find that an unanticipated increase in the cloud ratio (i.e., the share of a firm's revenues from cloud computing) has a positive and significant effect on excess stock returns; and it has a negative and significant effect on idiosyncratic risk. Yet these effects vary across market structures and firms. In particular, unanticipated increases in market maturity intensify the positive effect of moving into the cloud on excess stock returns. Further, unexpected increases in advertising intensity strengthen the negative effect of shifting to the cloud on idiosyncratic risk.