Investment in IT and the Business Performance of Financial Companies

Abstract

Global information technology and competitive financial alliances are helping to reshape the business landscape. Information technology (IT) and well functioning financial markets play a crucial role in increasing economic growth and prosperity. The purpose of this study is to empirically investigate the relationship between investment in IT and the business performance of financial companies. A vector autoregressive (VAR) model is used to test hypotheses one (increased spending on IT increases financial performance) and two (increased financial performance increases spending on IT) where financial performance is assumed to be adequately measured by stock price returns. Control variables for general business cycle conditions are included in the analysis. Our results show that the greatest benefits from increases in technology accrue to insurance and other financial companies. Managers of these companies could increase their business performance through strategic investment and use of IT.