Going Digital: Implications for Firm Value and Performance
Review of Accounting Studies (Forthcoming)
60 Pages Posted: 4 Aug 2022 Last revised: 1 Feb 2023
Date Written: February 1, 2023
Abstract
We examine firm value and performance implications of the growing trend of nontechnology companies engaging in activities relating to digital technologies. We measure digital activities in firms based on the disclosure of digital words in the business description section of 10-Ks. Digital activities are associated with a market-to-book ratio 8%–26% higher than industry peers, and only 25% of the differences in market-to-book is explained by accounting capitalization restrictions. To control for selection bias, we implement lagged dependent variable and IV regressions, and our market-to-book findings are robust to these specifications. Portfolios formed on digital activity disclosure earn a Daniel et al (1997)-adjusted return of 30% over a three-year horizon and a monthly alpha of 44-basis-points. On the other hand, we find weak evidence of near-term, positive improvements in fundamental performance, as we find some evidence of interim productivity increases but declines in sales growth conditional on digital activities.
Keywords: Digital Technologies, Valuation, Return Predictability, Financial Statement Analysis
JEL Classification: G32, G14, O13, M41
Suggested Citation: Suggested Citation