Financial impact of digitalization – A time-lagged analysis

While digitalization represents a widespread phenomenon, it does not always yield the expected financial benefits (digitalization paradox) and studies offer contradictory findings in this sense. This study aims to ease this contradiction by considering the potential time-lagged effects, the interrelatedness of financial indicators, and the complex nature of digitalization. We rely on the DuPont framework to investigate the impact of digitalization on interconnected financial performance indicators such as the efficiency of asset use (fixed asset turnover), profitability (EBITDA margin), and financial return (ROE), with immediate, 1-year, and 2-year effects. To assess firms’ digitalization, we analyze the annual reports of publicly listed automotive companies between 2012 and 2022 by two complementary methods (i.e., a machine learning algorithm and a keyword-centric content analysis). Panel regression results suggest that the financial impact of digitalization is not straightforward. It (i) improves fixed asset turnover both over short (same year) and longer periods (1–2 years lag); (ii) but does not lead to an increase in profitability; (iii) its impact on ROE becomes significant only after 2 years. In addition, these patterns are the same when traditional and advanced technologies are investigated separately, with a notable exception of ROE, on which traditional technologies exert both immediate and lagged positive impact. These findings suggest that companies investing in advanced digitalization can avoid the digitalization paradox through the more efficient use of assets but not through higher profitability, achieving better financial returns only in the longer run.