Digital transformation and corporate cash holdings in China's A-share listed companies

Abstract

Research background: In the digital era, digital transformation has become a strategic imperative for leadership agenda. Many firms have accelerated their pace in digital transformation to improve their performance and competitiveness. Despite increasing attention in the literature on the role of digital transformation in firms? operations, understanding the effect of digital transformation on corporate finance remains limited. This study focuses on cash holdings, which are essential for firms to survive and thrive.

Purpose of the article: The aim of this paper is to examine the critical role of digital transformation on the cash holdings of listed firms in China and provide micro evidence regarding the economic consequences of the digital economy from firm level. This study also aims to deepen our understanding of the influence of digital transformation on firms? operation and financial policy. Additionally, this paper attempts to provide relevant guidance for implementing policies to promote digital transformation and devise corresponding cash holding strategies.

Methods: The text analysis method is used to measure the degree of digital transformation of China?s A-share listed companies. The sample covers 19,337 observations from 2007?2020. A multiple regression model with firm and year fixed effect is developed to investigate the relationship between digital transformation and corporate cash holdings. In the robustness test, this paper substitutes the independent and dependent variables, and adopts instrumental variable estimation method. In the mechanism test, this paper uses the sub-sample regression method in the mechanism test.

Findings & value added: This study reveals that digital transformation can significantly reduce corporate cash holdings by alleviating the precautionary motive, agency motive and transaction motive of cash holdings. Further analysis shows that the negative effect of digital transformation on cash holdings is more profound in high-tech firms and non-state-owned enterprises. The methodology applied in this paper can be used in other economic research of firms. This study provides insights into the effects of digital transformation on corporate financial policy. This provides a solution for reducing firms? cash holdings. This study also deepens the understanding of digital transformation from a corporate perspective.

Keywords

digital transformation, cash holdings, financial constraints, agency cost, trade credit

References

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