The Nexus between IT Investment and Banking Performance in Korea

Abstract

This paper explores the nexus between the information technology (IT) investment of Korean banks and their management performance, employing panel cointegration testing and estimation techniques. Annual panel data on the financial statements and IT investment measures of banks are exploited in empirical analysis. Various panel unit root tests demonstrate that the data variables are integrated processes with unit roots. It suggests that the existing researches that do not consider panel unit roots suffer reduced reliability in their estimation and inference results due to the spurious regression problem. Three distinct panel cointegration techniques are used to estimate the profitability equation. The relationship between ROE and the capital budget ratio is found to be the strongest, which implies that the capital budget has had the greatest effects on enhancing bank returns. The IT investment of large banks shows a stronger positive influence on improving bank returns than that of small banks. The IT investment of wholesale banks specializing in corporate loans produces greater positive effects on bank profitability than that of retail banks. Several elucidations are provided for the above findings.