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positively related to market values, suggesting that they are value relevant; (2) the level of IT
expenditures (i.e., the IT intensity) has positive impacts on a bank’s earnings’ multiplier,
implying that it contributes to an enhanced persistence of earnings.
This study contributes to the literature in the following ways. First, it is among the few
that provide direct evidence on the positive effect of IT expenditures on banks’ market
values. Second, such results may have implications for investors and banking practitioners.
For one thing, capital market participants may be more informed about the long-term
competitiveness of a bank from its IT spending. For another, banking practitioners who are
in pursuit of improving intangible marketing activities (such as customer relations, product
promotion, branding activities, public relations, and advertising), and sustaining long-term
success should make consistent and considerable IT expenditures.
The rest of the paper proceeds as follows. The next section provides a brief discussion
of related studies and develops the hypotheses. Section 3 describes the data, variables, and
empirical models. Section 4 discusses our main empirical results and provides the
supplemental analyses, and Section 5 offers a summary and concluding remarks.
2. Literature Review and Hypotheses Development
Over the past decades, IT has gradually become one of the prime generators to build a
firms’ competitiveness. The rapid advancement in IT has been applied by most of the firms
around the world to save labor costs and to incorporate the information flow among internal
segments or external business partners. Particularly, IT has played a critical role in sustaining
viability for the banking industry, and almost all the top banks emphasize that IT is the key to
their success. For example, American Express states in its 2010 annual report that investing
heavily and consistently in IT is crucial for the bank to remain competitive.
3
The Bancorp
Inc. similarly indicates that IT capability is indispensable to meet the needs of its customers
3 “We continue to make significant expenditures, both in the United States and internationally, in our Card
systems and infrastructure to allow faster introduction and greater customization of products … Our
industry is subject to rapid and significant technological changes. In order to compete in our industry, we
need to continue to invest in business processes and technology advances across all areas of business,
including transaction processing, data management, customer interactions and communications, prepaid
products, alternative payment mechanisms and risk management and compliance systems…” excerpted
from the 10-K of American Express for 2010.