Does Digitalization Imply Uncertainty About the Future Prospects of a Firm? Evidence From Analyst Forecast Accuracy

Abstract

In recent decades, digital transformation has proliferated and prevailed among firms, profoundly affecting their operations, investments, and information management. To the extent that applying digital technologies has pros and cons to business activities, its implications for future firm performance remain uncertain to stock market participants. This paper focuses on financial analysts, who play the role of information intermediaries in the stock market, and examines how their forecasts for firms are shaped by corporate digitalization. Based on a large sample of Chinese listed firms, we find that analysts covering firms with higher levels of digitalization are likely to make more accurate forecasts. This result is robust to using two-stage least squares regression and difference-in-differences (DID) regression to mitigate potential endogeneity concerns and elicit causal inferences. Our mediation analysis reveals that digital transformation improves firms’ operational efficiency, investment efficiency, and information quality, thereby increasing analyst forecast accuracy. We also find that the association between corporate digital transformation and analyst forecast accuracy is more pronounced for analysts with greater work capabilities and more information resources, for firms with lower levels of innovation, as well as for high-tech industries. Our study provides new insights into the implications of digitalization for firms’ future prospects through the lens of analyst forecast accuracy.