Digitalization and firms' systematic risk in China

Kangqi Jiang, Mengling Zhou and Zhongfei Chen

International Journal of Finance & Economics, 2025, vol. 30, issue 1, 522-551

Abstract: Previous literature indicates that digitalization offers enterprises competitive advantages. However, However, its potential impact on risk management remains uncertain. Thus, this study explores the causality between digital transformation and systematic risk of Chinese public companies during 2007–2020. We developed a digital‐related keywords dictionary using textual analysis to identify investments in digital assets which serve as a measure of corporate digitalization. Our findings suggest a negative correlation between digital transformation and enterprise systematic risk. This relationship is further supported by robustness tests, adjustments for endogeneity, and random forest predictions. The risk‐reducing effect of digitalization is more pronounced in non‐state‐owned, small, high‐asset‐density, and low‐investor‐attention enterprises. Additionally, we explore potential mechanisms: the financial leverage channel, operating leverage channel, and investor loyalty channel. Empirical observations indicate that enterprise digitalization: (1) lowers financing costs, curbing an inclination towards excessive debt; (2) enhances operational cost management and stimulates sales growth; and (3) boosts long‐term investor holdings, decreases stock price synchronization, and mitigates crash risks. This study offers new insights into assessing the sustainability of digitalization and mitigating systematic risks of enterprises.

Date: 2025
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