Essays on Financial Markets and Information Technology

Abstract

Information technology (IT) has become a defining factor in how information in financial markets is accessed, processed, and interpreted. While the abundance of data provides new opportunities for decision-making, it also raises challenges related to noise, systemic risks, and regulatory oversight. This dissertation examines the multifaceted interplay between IT and financial markets, emphasizing the role of both hard and soft information in shaping financial outcomes. It addresses three questions: (1) whether IT investments strengthen banks’ ability to assess risks during periods of economic uncertainty, (2) how digital platforms alter the relevance of geographical distance in investment decisions, and (3) to what extent societal sentiment influences commercial banks’ loan portfolios. To explore these issues, three empirical studies were conducted. The first study analyzes U.S. commercial banks during the COVID-19 pandemic and shows that higher IT investments improve the precision of loan risk assessments in the form of loan loss provisions during a crisis. The second study uses proprietary data from a Mexican crowdinvesting platform and demonstrates that, despite the digital nature of the platform, geographical distance continues to shape investment behavior, with platform signals partially offsetting this disadvantage. The third study combines call report data of U.S. banks with a sentiment measure derived from music streaming behavior, revealing significant associations between societal sentiment and banks’ loan outcomes. Taken together, these studies highlight that IT investments and IT capabilities are not only a matter of efficiency but also shape risk assessment and the integration of non-traditional data into financial decision-making. This dissertation, by examining IT across different financial contexts, enhances our understanding of how digital infrastructures and the access and processing of information together influence the functioning of modern financial markets.