Some evidence from the EU banking industry

This paper investigates the performance of Information Technology (IT) investments for a sample of 737 European banks over the period 1994-2000, giving a pooled total sample of 4459 observations. The aim is to investigate whether IT investments improve banks ’ profitability: do banks gain a competitive advantage from IT investments, and therefore higher profits in the short and long term? The relationship between IT investments and traditional accounting performance measures shows the lack of a clear association, consistently with some prior studies. To overcome the limitations of this traditional approach, a different specification of the performance measure is used in this paper: it employs a measure of operational productivity, the so called X-efficiency, able to incorporate the various unobservable IT impacts. The empirical findings suggest that the impact of IT investments on banks ’ X-efficiency is negative on the profitability side in the short term. However, the impact of IT on costs in the long term (known as technical change) has made a positive contribution across European banks, reducing the real annual cost of production by about 3.1%. In addition, the impact of technica