Abstract
This paper investigates whether and how digital technology affects the sensitivity of corporate investment to stock price in China. Employing text analysis, we measure firm-level adoption of digital technology. Our findings show that digital technology has a strong positive effect on the investment-to-price sensitivity. After addressing endogeneity problems and conducting a set of robustness tests, the main effect remains consistent. Mechanism tests suggest that digital technology enhances stock price informativeness, thereby increasing the investment sensitivity to stock price. Furthermore, this positive effect is more pronounced among firms with lower information transparency, higher institutional ownership, and higher managerial ownership. Our paper contributes to the literature by demonstrating that digital technology helps to improve the investment-to-price sensitivity.
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