The Impact of Digitalization on Operational Risk: An Organizational Information Processing Perspective

Abstract

Digitalization has emerged as a modern risk mitigation tool for organizations. However,  little is known about how digitalization influences operational risk. Drawing upon organizational information processing theory, we propose that digitalization reduces operational risk through internal control system quality and supply chain network (SCN) centrality. Our study also introduces diversification as a contextual condition. Based on the data of Chinese public firms from 2010 to 2019, the results reveal that both internal control system quality and SCN centrality partially mediate the negative relationship between digitalization and operational risk. Specifically, a high degree of digitalization leads to high-quality internal control systems, which, in turn, leads to low operational risk. Inversely, digitalization increases SCN centrality, which, in turn, leads to high operational risk. Furthermore, the positive mediation effect of SCN centrality is significantly more substantial than the negative mediation effect of internal control system quality. Subsequent moderating effect analysis shows that diversification weakens the mediation effect of internal control system quality but strengthens the mediation effect of SCN centrality. This study deepens the understanding of the risk mitigation effect of digitalization and offers meaningful metrics for managers to prevent firms from suffering unexpected risks.

Keywords: digitalization, operational risk, internal control systems, supply chain network centrality, diversification