The financial effect of firm digitalization: Evidence from China

Digitalization has been reshaping business structure and has had a tremendous impact on firm development. However, a “paradox” exists about how digitalization affects firm performance. To explain this phenomenon, this study explores the financial effect of firm digitalization and reveals boundary conditions under which digitalization influences firm performance. Using panel data from A-share listed companies in China between 2012 and 2019, this study finds that digitalization can significantly improve firm performance, and top management team experience is an essential complementary resource that can effectively strengthen the promotion effect of digitalization on financial performance. Furthermore, the pressure of industry competition can be transformed into the power of firm digitalization, thus amplifying the financial effect of digitalization. The mechanism test shows that enhancing total factor productivity can be a potential mechanism of digitalization to improve firm financial performance. The heterogeneity tests show that the financial effect of digitalization is better in state-owned enterprises and enterprises located in areas with high judicial transparency. This study determines the business value of digitalization and the boundary conditions of digital value creation, which helps to understand the integration of digital technology and the real economy.