How Does Digital Innovation Reduce Corporate Investment Inefficiency?

This research examines how digital innovation, including digital product and process innovation, influences investment inefficiencies of firms in emerging markets. Based on publicly listed firms in China from 2004 to 2023, we find that digital innovation significantly reduces firms’ investment inefficiencies. This effect is particularly pronounced in firms with Science, Technology, Engineering, and Mathematics (STEM)-trained board members and those in highly integrated markets. Heterogeneity analyses reveal that the benefits of digital innovation are more substantial in smaller and non-high-tech firms. Digital innovation improves managerial expectations, risk tolerance, and resource mobilization, thereby reducing investment inefficiency. This research highlights digital innovation’s vital role in improving corporate governance and resource allocation, ultimately fostering more efficient corporate investments.