Digitalization and corporate investment efficiency: Evidence from China

We study whether digitalization improves investment efficiency using a sample of 3056 listed enterprises in China from 2007 to 2020. We adopt textual analysis to measure corporate digitalization, and preliminary tests verify the validity of our text-based indicators of digitalization. Our baseline results suggest that companies embracing digitalization exhibit lower instances of both underinvestment and overinvestment. We verify the robustness of our findings using diverse methods, including the Instrumental Variable (IV) method, Difference-in-Differences (DID) method, placebo test, and Propensity Score Matching (PSM) method. Cross-sectional analysis demonstrates an asymmetrical impact of digitalization on investment efficiency. Corporate digitalization is more effective in reducing underinvestment for small enterprises, non-stateowned enterprises, and enterprises in cities with low fiscal constraints. Enterprises with high agency costs, as well as manufacturers specializing in consumer products, derive greater benefits from a reduction in overinvestment. Mechanism analysis confirms that corporate digitalization can mitigate overinvestment by correcting managerial expectations and agency behaviors. Simultaneously, it alleviates underinvestment by diminishing the financing frictions of corporations. Our findings offer a novel perspective on how digitalization can endow companies with competitive advantages.