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The impact of digital transformation on firm risk: Effort by talk or effort by walk

Author

Listed:
  • Cao, Zhicheng
  • Tang, Chenxi
  • Li, Zhicheng

Abstract

Digital transformation, which involves integrating digital technologies to improve corporate products, services, and operations, has attracted growing attention from both policymakers and scholars. While recent studies emphasize its multifaceted impacts, the effects of digital transformation on firm risk remain insufficiently understood. This paper investigates how digital transformation affects firm risk in China, using the Enterprise Digital Transformation Index (EDTI) constructed from company annual reports. The results indicate that the impact of EDTI on firm risk depends on the substance of digital transformation efforts. Specifically, EDTI reduces idiosyncratic risk when firms undertake substantive digital initiatives but increases systematic risk when digital achievements are limited and claims are overstated. Further analysis shows that the positive effect of EDTI on systematic risk became more pronounced following the introduction of the “Digital China” policy and can be attributed to firms’ heightened operating and financial leverage.

Suggested Citation

  • Cao, Zhicheng & Tang, Chenxi & Li, Zhicheng, 2025. "The impact of digital transformation on firm risk: Effort by talk or effort by walk," Pacific-Basin Finance Journal, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:pacfin:v:94:y:2025:i:c:s0927538x25003087
    DOI: 10.1016/j.pacfin.2025.102971
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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M15 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - IT Management

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