Jianrong Wang, Wenjia Li, Bo Wang, and Zhenyuan Wang Applied Economics, Vol. 57 No. 55, pp. 9345-9359

DOI: https://doi.org/10.1080/00036846.2024.2416090

What the paper is about

Digital transformation, folding tools like AI, big data, and cloud computing into how a firm operates, has become a strategic priority for firms in emerging markets such as China, pushed along by government initiatives like Made in China 2025. Much of the existing research asks whether digitalization helps firms grow or innovate. Whether it makes a firm’s performance more stable over time, a proxy for its underlying business risk, has drawn far less attention.

Using a sample of Chinese listed firms from 2013 to 2021, this paper asks exactly that. Rather than relying only on keyword counts in annual reports, the common approach in earlier work, the authors build a score-based digital transformation index across six dimensions, strategic guidance, technology adoption, organizational empowerment, environmental support, digital achievement, and digital application, which also draws on dedicated digital leadership roles, patent output, and industry-level digitalization.

Measuring performance volatility as the standard deviation and range of a rolling three-year industry-adjusted return on assets, the paper finds that firms with higher digital transformation scores show significantly less performance fluctuation than their peers. The relation holds under an instrumental variable approach built on the average digitalization level of peer firms in the same industry and province, survives a longer four-year rolling window for volatility, and is unchanged once high-tech firms, which might have a built-in edge in managing volatility, are dropped from the sample.

Breaking the index into its parts points to strategic guidance, organizational empowerment, environmental support, and digital achievement as the components doing the work, rather than the sheer frequency of digital-technology mentions on its own. The stabilizing effect also appears to run through reduced information asymmetry between the firm and the groups it depends on. Volatility falls more among firms that receive fewer on-site visits from institutional investors, among firms facing tighter financial constraints, and among firms with a more dispersed customer base, a pattern consistent with digitalization substituting for the information that would otherwise come from investor monitoring, bank due diligence, or close customer relationships.

Both state-owned and non-state firms benefit, though the stabilizing effect is somewhat larger for SOEs, which make up a substantial share of Chinese market capitalization and are a common holding for institutional and retail investors alike.

Highlights

  • Digital transformation is associated with significantly lower firm performance volatility.
  • An instrumental variable approach and several robustness checks support a causal reading.
  • Strategic guidance, organizational empowerment, environmental support, and digital achievement drive the effect.
  • The pattern fits with digitalization reducing information asymmetry with investors, banks, and customers.
  • State-owned enterprises see a somewhat larger stabilizing benefit than non-state firms.