Measuring the Effect of Digitalization Efforts on Bank Performance

Abstract

There is an ongoing debate on whether and under which circumstances digitalization investments can increase the financial performance of firms (IT profitability paradox). This is particularly relevant for banks as a highly technology-intensive industry. The debate to date suffers from a lack of structured reported information on digitalization investments. As our main contribution, we suggest new measures of digitalization investments and related digital capabilities by applying text mining methods to exploit unstructured information from banks annual reports. We confirm the measure for digitalization investments by showing that it explains a substitution of personnel expenses with non-personnel expenses within banks and, in addition, banks IT patenting activity. In line with the literature on the business value of digital technologies, sole investments in digital technologies do not increase performance but banks need to possess digital capabilities to increase bank performance.