Bank Performance and the Solow Paradox

Abstract

Using a unique dataset for 157 U.S. banks from 1993 to 2006 and dierentiating between Hardware- and Software Technologies operationalized by the adoption and usage of Enterprise Resource Planning (ERP) technologies and IT-service operationalized by the IT-expertise of the bank we assess the eects of Infor- mation Technology on bank performance. Although we …nd that the adoption of ERP technology has a negative direct eect on bank pro…tability indicating the existence of the commonly known pro…tability paradox, we reveal this para- dox by addressing potential endogeneity problems. Moderating eects of bank size and IT-expertise on ERP technologies are shown to positively aect bank pro…tability. Using dierent analyzing techniques our results suggest that ERP technologies have a positive eect on bank pro…tability. Firstly we show that this may be strengthened by bank size. Secondly we …nd that banks that adopt ERP technologies should have high IT-expertise as IT-expertise positively correlates with bank pro…tability and it also moderates the ERP technology. Our results are robust to dierent measures of performance such as Return on Assets, Return on Equity and E¢ ciency measures, measured using Stochastic Frontier Analysis.