Booster or trapper? Corporate digital transformation and capital allocation efficiency

Yumei Fu and Chun Guo

Research in International Business and Finance, 2025, vol. 73, issue PB

Abstract: This study examines the effects of digital transformation on firm-level capital allocation efficiency by focusing on Chinese listed firms from 2007 to 2022. Using the investment-Q framework, we provide evidence that digital transformation enhances investment sensitivity to Q, suggesting that digital transformation improves firms’ capital investment efficiency. Further research shows that digital transformation enhances capital allocation efficiency by alleviating information asymmetry, reducing agency costs, and easing financial constraints. Cross-sectional surveys reveal that the positive effect of digital transformation on capital investment efficiency is more pronounced for firms with more corporate diversification, in high-technology industry, those with more subsidiaries, and those facing higher industry competition and economic policy uncertainty. Overall, from the perspective of capital allocation efficiency, digital transformation is the booster rather than the trapper for firms in developing markets. This study enriches the literature on investment efficiency and has significant implications for firms’ digital transformation.

Keywords: Digital transformation; Capital allocation efficiency; Information asymmetry; Agency costs; Financing constraints (search for similar items in EconPapers)
JEL-codes: G12 G18 G32 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:73:y:2025:i:pb:s0275531924004434

DOI: 10.1016/j.ribaf.2024.102650

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