A Summary of “Going Digital: Implications for Firm Value and Performance” by Chen, W. & Srinivasan, S. (2019)

This academic article represents a large empirical study investigating the implication of implementing digital technologies on firm-level performance and the perceived market value. In essence, the findings suggest that the market values investment in digital transformation as disclosed in the management text of the 10k, but the non-financial value of digitalization is poorly reflected in the accounting information.
We know from prior research that investing in digital technologies tend to increase productivity while also presenting firms with new or expanded growth opportunities. Prior research has shown increased productivity in coordination, workflow activities (including inventory management), and, if IT is integrated in the digitalization efforts, an improvement in innovation capabilities and efficiency. The improvements can have an impact both horizontally and vertically in the organization. Based on this prior research, the authors conclude that digital activities will have an impact on firm value, and, although not specifically studied before, disclosure of non-accounting/financial information should be relevant to market value. One of the resulting research questions is to figure out whether markets value digital activities fully when they are disclosed to the market. Although not implicitly stated, the authors hypothesize that a firm’s value go up as its digital activities increase.
Various determinants of digital activity are used to measure the correlation with unexpected earnings, return on investment, and market-to-book value. Consequently, digital activity is regressed on daily returns, and cumulative abnormal returns (CAR) Is regressed in unexpected earnings (UE), and controls.
The results clearly indicate (with statistical significance) that firms that engage in digital activities are valued more highly than their peers economically. Asset turnover improves immediately following digital activity. However, in the year of the digital disclosure, there is a 10-30% lower sales growth relative to industry peers, but by the third year, the difference in sales growth disappears. This can be accounted for by the additional investment (in both financial capital, human capital, and marketing) required when embarking on a digital transformation journey. Indeed, the results also show that the presence of a tech manager matters for the performance implications of digital activities.
This study contributes to the research on digital transformation by introducing a new source of non-financial information that significantly drives prices. It also provides creative and wide-ranging firm-level evidence on the valuation impact of such digital activities. Lastly, it reaffirms the notion that shared fixed cost of technology adoption is highly beneficial, especially in the light of the amplified digital transformation efforts caused by the current pandemic.
From a practical standpoint, this study suggests that investing digital technologies is good for firm value, but it is hard to capture in the current financial statements.