Unpacking leverage and lagged effects: do digitally mature and complex firms outpace their rivals?

Abstract

This study explores whether digitally transformed firms outperform non-digital counterparts in terms of stock return volatility asymmetry and leverage behaviour, focusing on firm-specific characteristics such as complexity and maturity within UAE firms. By examining the lagged effects of negative news on these behaviours, the study captures differences in market responses over time. Utilizing a firm-level Exponential Generalized Autoregressive Conditional Heteroskedasticity (E-GARCH) model and stock returns data from 2012 to 2024, the research analyses 661 firms (368 digitalised and 293 non-digitalised), categorised further by firm complexity and maturity. Leverage effects are evaluated across multiple lags, with significant findings emerging particularly at lag intervals four and five, indicating the relevance of historical return patterns and supporting theories of market underreaction and delayed information processing. To ensure robustness, Variance Decomposition Analysis (VDA) and Impulse Response Analysis (IRA) were applied, reinforcing the credibility of the results. Digitally transformed firms demonstrated strategic advantages through the use of digital technologies to enhance efficiency, expand market reach and innovate more rapidly, thereby positioning themselves competitively. The impact of macroeconomic variables, including GDP growth, inflation, and oil price fluctuations, was consistent with existing literature. These findings offer practical insights for investors seeking to optimise portfolio strategies by understanding leverage gaps and time-lagged market reactions between digital and non-digital firms. Moreover, policymakers may apply these insights to design more informed macroeconomic and industrial strategies. The study contributes to the growing literature on digital transformation by linking volatility dynamics with firm maturity and complexity in the UAE context.