Digital Transformation and Firm Value: Evidence on Capability Formation and ESG Conditioning

ABSTRACT This study examines the influence of digital transformation (DTF) on firm value by recognizing dynamic capabilities (DC) as a mediating factor and ESG performance as a crucial boundary condition. The study utilizes dynamic capabilities and stakeholder perspectives and establishes a moderated mediation framework to analyze the transition of digital investments into market valuation. It employs panel data from energy firms and uses OLS estimation, Heckman two‐step correction, robustness checks, heterogeneity analysis and bootstrap‐based moderated mediation to present robust evidence on digital value creation. Findings indicate that DTF significantly enhances firm value, while ESG performance strengthens this positive relationship. Dynamic capabilities partially mediate the effect of the DTF‐firm value link, suggesting that digital investments improve market valuation by enhancing firms' adaptive and reconfiguration capacities. The results remain robust after addressing selection bias and valuation heterogeneity. Heterogeneity analysis displays stronger effects for non‐state‐owned firms, new energy enterprises, younger firms, and profitable firms. But the indirect pathway through DC is not significantly moderated by ESG. This implies that it mostly has a reinforcing effect on direct valuation changes through external legitimacy and does not change internal capability building. The findings are significant contributions to the literature because they shed light on the mechanisms and boundary conditions that impact firm value created by DTF. It also has significant consequences for corporate policy and strategy in the energy sector transformation.