How digital transformation reduces stock Price crash risk: Unpacking the roles of financing and efficiency

Zhentang Liang, Xuedong Liang, Wenju Wang and Yunying Zhao

International Review of Financial Analysis, 2025, vol. 107, issue C

Abstract: Although corporate digitalization's impact on productivity and innovation has been widely studied, its role in financial risk management remains underexplored. Stock price crash risk poses a serious threat to market stability, with the potential to undermine investor confidence and trigger systemic disruptions. Existing literature largely emphasizes traditional determinants of crash risk (e.g., corporate governance and accounting conservatism) while largely neglecting technological factors. This omission limits our understanding of how digital transformation might act as a safeguard against extreme market events. This study examines whether digital transformation reduces stock price crash risk through two primary mechanisms: easing financing constraints and enhancing operational efficiency. Drawing on a comprehensive dataset of Chinese A-share listed firms from 2011 to 2022, we employ multiple regression techniques (i.e., instrumental variable (IV) analysis, propensity score matching (PSM), and Heckman two-stage models) to address potential endogeneity concerns. The empirical results indicate that digital transformation significantly lowers crash risk by improving information transparency, reinforcing governance structures, and optimizing resource allocation. Mediation analysis confirms that digital adoption mitigates crash risk by reducing financing constraints and enhancing operational efficiency. Furthermore, heterogeneity analyses show that these risk-mitigating effects vary by ownership type, industry, and stage in the firm lifecycle, being more pronounced in nonstate-owned enterprises, technology-intensive sectors, and firms in the growth and maturity phases. These findings contribute to a deeper understanding of the role of digitalization in corporate risk management and offer valuable guidance for firms, investors, and policymakers seeking to strengthen financial resilience through strategic digital initiatives.

Keywords: Digital transformation; Stock price crash risk; Financing constraint; Operational efficiency; Corporate governance (search for similar items in EconPapers)
JEL-codes: G32 M15 O33 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:107:y:2025:i:c:s1057521925005952

DOI: 10.1016/j.irfa.2025.104508

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