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Bank Performance and the Solow Paradox Summary

The problem of legacy information technologies in conjunction with the excessive risks associated with the implementation of huge information technologies such as Enterprise Resource Planning systems have a potential to lead to bank failures, and thus, financial instability. Hence, using a unique data-set of 157 U.S. banks from 1993 to 2006, and differentiating between hardware and software technologies operationalized by the investment in Enterprise Resource Planning systems and information technology services operationalized by the information technology expertise of the banks, we assess the effects of information technology investments on bank performance. We find, at first glance, that the usage of Enterprise Resource Planning systems has a negative, direct effect on bank performance, indicating the existence of the commonly-known Solow Paradox. However, we provide an explanation for the existence of this paradox by addressing potential endogeneity problems: by controlling for the endogeneity, our results suggest that Enterprise Resource Planning systems have a positive effect on bank performance. We further show that the effect of Enterprise Resource Planning systems on bank performance may be strengthened by bank size. Regarding information technology services, we show that it has a positive, direct effect on bank performance. Additionally, banks that use Enterprise Resource Planning systems should have high information technology expertise as information technology expertise positively correlates with bank performance and moderates the impact of Enterprise Resource Planning systems. Our results are robust to different measures of performance such as return on assets, return on equity and efficiency measures, computed using Stochastic Frontier Analysis.

Author : Hasan Doluca

Publisher : SSRN

Published : 2013

ISBN-10 :

ISBN-13 :

Number of Pages : 33 Pages

Language : en

Keyword :

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