The Econometrics Effect of Information Technology Investment on Financial Performance in the Jordanian Banking Sector over the Period 1993-2014

Abstract

This study measures theRelationship between IT investment and Financial performance in the JordanianBanking Sector over the Period 1993-2014. The profitability equation isestimated by panel least squares, and the effect of IT investment on bankprofitability and compared with different bank groups, such as large- andsmall-asset banks, and high- and low-IT use. The empirical analysis of thisstudy reveals that the IT ratio and EAR and INF have relatively strongexplanatory powers for bank profitability. The results indicate that for largebanks the estimates of the IT ratio are positive for ROA and ROE butsignificant for ROA only, while those of small banks are positive andsignificant for ROA and ROE. This implies that the ITI of small banks has astronger positive effect on bank returns than that of large banks. We can saythat the effect on ROA for large banks is less than smaller banks because ofdiminishing returns to scale. Moreover the results report that high- and low-ITbanks show significant positive coefficient estimates on ROE, while low bankshave significant positive coefficient estimates on ROA. Generally, the high-ITbanks’ coefficient estimates on ROE are larger. This is because the economicsof scale of high-IT banks with a high level of ITI as a factor input, leadingto a higher effect on profitability increase.Jordanian banks need to take carewith their adoption of information technology because of its impact on the profitabilityof banksKeywords:Information Technology Investment, Financial Performance, Banking Sector.