Is enterprise digital transformation beneficial to shareholders? Insights from the cost of equity capital

Abstract

The digital transformation has been an important choice for the majority of enterprises in China in recent years. This paper explores the impact of enterprise digital transformation on the cost of equity capital. Our findings demonstrate that digital transformation is significantly associated with a lower cost of equity capital in Chinese A-share listed companies. The underlying mechanisms involve mitigating information risk, operating risk, and enhancing corporate governance. The main effect is more pronounced for firms with more complex business model, more dispersed operating activities, a greater focus on their investors, higher valuation risk and increased investor attention. In addition, owing to the diminished cost of equity capital, we find that digital transformation facilitates firms in adjusting their capital structure to the target value at a faster adjustment speed. In particular, firms with excessive debt are more likely to deleverage by “increasing equity”, representing a more positive way to deleveraging. Overall, our findings suggest that the enterprise digital transformation is important for shareholders' decisions.