Going Digital: Implications for Firm Value and Performance

We examine firm value and performance implications of the growing trend of non-technology companies engaging in activities relating to digital technologies. We measure digital activities in firms based on the disclosure of digital words in the business description section of 10-Ks. Digital activities are associated with a market-to-book ratio 8-26% higher than industry peers, and only 25% of the differences in market-to-book is explained by accounting capitalization restrictions. To control for selection bias, we implement lagged dependent variable and IV regressions, and we find that our market-to-book findings are robust to these specifications. Portfolios formed on digital activity disclosure earn a DGTW-adjusted return of 30% over a 3-year horizon and a monthly alpha of 44-basis-points. On the other hand, we find weak evidence of near-term, positive improvements in fundamental performance, as we find some evidence of interim productivity increases, but declines in sales growth conditional on digital activities.