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Identifying Useful Measures For It Investment Finance Essay

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In this section Im going to identify useful measures for IT investment and it is
implication for financial performance of banks. The determination of IT investment
is problematic because of lack of consensus in defining and measuring such
investment. Researchers have difficulty in agreeing as to what model actually
constitutes IT. Some used a narrow definition that includes only an information
system while others used a broader definition that also includes data
communication. Some used direct measures while others used surrogate measures.
Previous researchers have used various ratios as measures of IT investment. Bender
and Harris and Katz used IT expense as a percentage of total operating expenses as a
measure. The Diebold group used IT budget as a percentage of revenue. A similar
measure, It expense to premium income, was also used by Harris and Katz. All of
those ratios have advantages and disadvantages.
The population is all the LCB banks which are registered in Colombo stock exchange,
and the sample will be five banks in that population. It includes two government
banks and three non government banks, namely Bank of Ceylon, Peoples' bank,
commercial bank, Hatton national bank and HSBC.

Primary and secondary research will be integrated as a data gathering procedure.

The reason for this is to be able to provide adequate discussion for the readers that
will help them understand more about the issue and the different variables that
involve with it. In the primary research, managers and staff will be surveyed and will
be distributed to the respondents through email. Participation of the respondents
will be treated with maximum confidentiality. Two questionnaire papers will be
surveyed. First one provide for the managers and it will included some questions
regarding to requesting information about the IT investments and financial
performance of the banks and other one provide to staff members of the IT
department asking questions to get information about the computers usability and
disadvantages or advantages of IT. But this survey method has more drawbacks, such
as information may not be 100% reliable, some managers may reluctant to give some
information, understanding weaknesses may be occurred and if it is a questionnaire,
some responding banks may not have defined IT investment as same way.

To avoid those drawbacks, I have decided to use secondary data for my research.
Sources in secondary research will include annual reports, previous research reports,
newspaper, magazine and journal content. Therefore it is efficient using current year
financial statements and highlights for quarterly and annual and other reports as a
secondary data. It is more reliable than survey. As well as it provide two or three year
comparison of balance sheet, income statement and operating income, revenue and
earnings per share of the banks. My research period will be 2003 to 2009 and to get
present condition information current year will be surveyed. . Data will be analyzed
using the latest SPSS software.
Model 1
Since the norms for IT investment and Banks financial performances data vary from
bank to bank , proir to conducting statitical analysis, each ratio will be standardized
by subtracting its mean from the ratio itself and and then deviding the result by
standard deviation. For avoid varinces of datas it will effective to mesure
mean,Standard deviation and range for IT investment and financial performance of
the banks.
Budgeted IT investment ratio = Budgeted IT investment *100
Total RevenueTo mesure a bank's IT invetment, the present research uses five ratios,
including IT budget as a percentage of revenue, value of a bank's IT as a percentage
of revenue, percentage of IT budget spent on staff, percentage of IT budget spent on
the training of IT staff and number of PCs and terminals as a percentage of total
employee. The first ratio reveals how much a bank is spending on IT relative to its
compititors. It can be calculate
Value of IT investment ratio = IT value *100
Total RevenueThe IT value ratio reflect to current position of a bank's technology, IT
value figures are estimates of the current market value for all IT equipments,it can be
The staff spending cirterion reflects the bank's relative investment in IT staff. It can
be calculate
Budgeted IT spend for staff = Budgeted IT spend on staff *100
Number of IT staff

As well as information system managers must keep their employee well trained. The
trining ratio used to mesure the relative amount spent by bank for this purpose. It
can be calculate
Budgeted IT investment on training staff = Budgeted IT spend on training staff *100
No of training Staff
The last ratio mesures the extent to which the bank has made IT availabe to banks
users. This ratio can be calculate
IT usability ratio = No of PCs and terminals *100
Total employees
Using above ratios I will find out mean and standard deviation of those ratios.
Standard deviation is a measure of how far apart the data are from the average of the
data. If all the observations are close to their average then the standard deviation will
be small.
Based on review of previous research, five direct measures of financial performance
will be selected for this study. Return on investment (ROI), Return on equity (ROE),
Return on assets (ROA), Earnings per share (EPS) and Net profit margin (NPM)
ROI = Gain from investment-Cost of investment
Cost of investment Return on investment can be measured using following ratio,

ROE = Net income

Shareholder equity
ROA = Net income
Total AssetsReturn on assets (ROA) can be calculate,
EPS = Net income - Dividends on preferred stock
Average outstanding sharesEarnings per share (EPS) can be calculate,

Net profit margin (NPM) can be calculate

NPM = Net profit
Total Income
After measuring mean and standard deviation it is effective to measure correlation of
those two set of variables. Correlation is a statistical measurement of the relationship
between two variables. Possible correlations range from +1 to -1. A zero correlation
indicates that there is no relationship between the variables. A correlation of -1
indicates a perfect negative correlation, meaning that as one variable goes up, the
other goes down. A correlation of +1 indicates a perfect positive correlation, meaning
that both variables move in the same direction together. Correlation helps to identify
the relationship between Information technology and financial performance of the
banks. In the first step will be find out IT investments correlated with themselves and
financial performance correlated with themselves. Then the IT investment ratios will
be next correlated with the financial performance ratios to investigate for the
possible presence of, and the nature of pair wise relationship among the measures.
Carl Pearson correlation analysis will be use for this purpose.
Model 2
Above model shows that how much IT investments affecting to the financial
performances, it shows only percentage figures. But hypothesis testing may be
reflecting what factors actually affect to the increase financial performances relating
IT investments. So I have selected hypothesis testing as my second model.
In this model Key variables will be measured in an attempt to practice identifying
dependent and independent variables and to explain how the independent variable
affects the dependent variable.
Independent Variable Dependent variable
Internet banking
ATM machines
Computer system
Return on Equity (ROE)

Net profit margin (NPM)

Earnings per share (EPS)
Return on Investment (ROI)
According to above diagram, financial performances (dependent variable) depend on
following financial indicators. Internet Bank: It is how the Internet used frequently
by the Bank from a variable It is one of the independent variables, ATM: The number
of ATMs owned by the bank in the period, it is one of the independent variables. ,
Computer system: It is the net investment bank in the computer software, hardware
and equipment in the period i. It is one of the independent variables
However, this model will also divide into another sub-models concerned with
measuring the impact of independent factors of each of the indicators of financial
Affecting variables
Return on Equity(ROE)
Internet banking, ATM machines, Computer system (Hardware, software and other
Net profit margin(NPM)
Internet banking, ATM machines, Computer system (Hardware, software and other
Earnings per share(EPS)
Internet banking, ATM machines, Computer system (Hardware, software and other
Return on Investment (ROI)
Internet banking, ATM machines, Computer system (Hardware, software and other

Hypotheses Development
The main Hypotheses is There is no statistically significant impact on the use of
information technology to improve the financial performance in Sri Lankan banks.
H01: There is no statistically significant impact on the use of IT in Sri Lankan banks
in the ROE
H02: There is no statistically significant impact on the use of IT in Sri Lankan banks
in the NPM
H03: There is no statistically significant impact on the use of IT in Sri Lankan banks
in the EPS
H04: There is no statistically significant impact on the use of IT in Sri Lankan banks
in the ROI
Hypothesis Testing
First I am going to examine the reliability of statistical analysis for the data by
identifying how this data is close to normal distribution, if the data will not have
normal distribution, then it should be a subject to necessary treatment . If it will
close to the normal distribution I can use it correctly to test the hypothesis. After that
I will be use regression model to identify effect of many independent variables on
dependent variable. Regression analysis includes techniques for modeling and
analyzing several variables, when the focus is on the relationship between a
dependent variable and one or more independent variables. More specifically,
regression analysis helps to understand how the typical value of the dependent
variable changes when any one of the independent variables is varied, while the other
independent variables are held fixed.