Firms' digitalization and stock price crash risk

Effects of digital transformation on value creation, productivity, and innovation have been previously examined. However, only a few studies have explored how the capital market responds to firms' digitalization, and the relationship between digital transformation and stock price crash risk has remained unknown. The current study explores this gap by using data of listed firms in China in 2007-2020. We create a Chinese dictionary containing digital keywords by using the deep learning model, and set the proportion of intangible assets related to digital keywords as proxy for digital transformation. Findings show that digital transformation significantly reduces stock price crash risk. Moreover, results remain robust after addressing endogeneity problems and several robustness tests. Heterogeneity analysis suggests that the attenuation effect of digital transformation on stock price crash risk is strong for firms that are small, with low analyst attention, in the tech industries, and in areas with high trust. This study validates two potential mechanisms, namely, information and internal control channels. Lastly, digital transformation significantly reduces opacity and increases internal control quality.

Automated summary

This study examines the relationship between digital transformation and stock price crash risk by analyzing data of listed firms in China from 2007 to 2020. The findings show that digital transformation significantly reduces stock price crash risk, and this result remains robust after addressing endogeneity problems and conducting several robustness tests. Heterogeneity analysis reveals that the attenuation effect of digital transformation on stock price crash risk is stronger for small firms, firms with low analyst attention, firms in the tech industries, and firms in areas with high trust. This study validates the information and internal control channels as potential mechanisms, and also demonstrates that digital transformation reduces opacity and improves internal control quality.