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    Going Digital: Implications for Firm Value and Performance
    10 Jun 2019Working Paper Summaries

    Going Digital: Implications for Firm Value and Performance

    by Wilbur Chen and Suraj Srinivasan
    More and more nontechnology companies are adopting digital technologies like AI, data analytics, and machine learning. This study of the economic performance of nontech firms adopting new digital technologies finds a persistent future increase in valuation. However, investors only slowly incorporate the value implications of digital activities into prices. Nontech companies with senior executives with tech talent improve performance more than those without.
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    Author Abstract

    We examine the firm value and performance implications of the growing trend of non-technology (non-tech) companies adopting digital technologies such as artificial intelligence, big data, cloud computing, and machine learning. For the entire universe of U.S. publicly listed firms, we identify companies that are going digital using textual analysis of corporate financial reports and conference calls. We first show that digital adoption by non-tech firms has dramatically grown in recent years. Non-tech digital adopters exhibit greater stock price co-movement with technology companies than with their industry peers, suggesting that the digital activities are making them similar to tech firms. The digital adopters hold more cash and are larger, younger, and less CapEx-intensive. Digital adoption is associated with higher valuation―market-to-book ratio is higher by 7%–21% compared to industry peers—and is higher for firms that are younger, more CapEx-intensive, exhibit higher sales growth, and are in industries where digital adoption is prevalent. However, markets are slow to respond to the disclosure of digital activity. Portfolios formed on digital disclosure earn a size/book-to-market adjusted return of 25% over a 3-year horizon and generate a monthly alpha of 40 basis points. Finally, while there is no significant improvement in financial performance as measured by return-on-assets conditional on digital activities, there is a significant increase in asset turnover as well as a significant decline in margins and sales growth. Managerial expertise is important for digital technology adoption, as firms with senior technology executives perform better when going digital.

    Paper Information

    • Full Working Paper Text
    • Working Paper Publication Date: May 2019
    • HBS Working Paper Number: HBS Working Paper #19-117
    • Faculty Unit(s): Accounting and Management
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    Suraj Srinivasan
    Suraj Srinivasan
    Philip J. Stomberg Professor of Business Administration
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