Does digital transformation enhance a firm's performance? Evidence from China

Abstract

We examine the impact of digital transformation (DT) on performance using a sample of Chinese firms. Leveraging the recent advances in textual analysis and a manual reading of annual reports, we quantify whether a firm has DT and the extent of its DT. The results show that DT enhances a firm's performance. In addition, we document that when a firm has DT, it has lower cost, better operating efficiency, and better innovation success leading to better performance. After decomposing the DT into normal and excess DT, we document that the normal DT helps a firm's performance in the longer term while the excess DT can boost a firm's performance in the first two years. Additional analysis suggests that DT is most helpful for firms in the mature stage of their product life cycle.