Walking and Talking:Rewards of"Actions over Words"in Digital Transformation
Digital transformation(DT)initiatives have become a corner-stone for firms striving to remain competitive and relevant in an increas-ingly digitalized economy.For Chinese A-share listed firms between 2014 and 2019,DT activities capture both forward-looking corporate intentions and tangible investment efforts as disclosed in annual reports.This study explores the phenomenon of"action over words"within DT,characterized by the decoupling where actual DT investments exceed prior disclosed projections.We aim to determine whether this decou-pling elicits a positive market reaction and serves as a signal of devel-opmental momentum and corporate credibility enhancement in China's rapidly digitalizing landscape.Methodologically,this paper develops an innovative measure of DT decoupling by employing Z-scores to quantify the relationship between disclosed DT intentions and actual investments.Specifically,the Z-score for actual DT investment is derived from the intangible asset data in financial reports,capturing investments into digital systems,software,and technologies.In contrast,the Z-score for forward-looking DT state-ments is calculated based on DT-related language in the management discussion and analysis sections of annual reports.By applying Corpo-rate Social Responsibility(CSR)metrics,specifically those designed by Sauerwald et al.(2019)and Li Zhe et al.(2021),this paper operationaliz-es DT decoupling,creating a structured method to assess the alignment between corporate DT disclosures and corresponding investments.This approach provides a systematic way to measure discrepancies and offers insights into whether firms are fulfilling their digital commitments or merely engaging in impression management.Our empirical analysis of market responses to"action over words"in DT investments reveals a broadly favorable response from investors,indicat-ing that such proactive behavior is interpreted as a positive indicator of a firm's commitment to growth and alignment with digital transformation initiatives.Firms that exceed initial DT promises by engaging in substan-tive DT investment are rewarded by the market,suggesting that the de-coupling phenomenon,when it signals action over rhetoric,may serve as a credible signal of progress and capability.This reaction is particularly robust in environments where firms are under external pressure to inno-vate or when national policies strongly support digital transformation.By aligning actions with statements,firms demonstrate to the market an ability to act decisively in response to both internal and external de-mands,thus increasing investor trust and perceived reliability.This market response is grounded in two core mechanisms.First,the"development momentum mechanism"posits that investors view DT"action over words"as a positive signal of a firm's willingness to lever-age digital advancements for future growth.Such firms proactively ad-just their DT investments to align with national goals for technological innovation and economic transition,resonating with the national push toward a digital economy as outlined in China's Digital Economy Plan.This proactive adjustment reflects responsiveness to evolving policies,enabling firms to secure early-mover advantages in competitive digital landscapes.As such,investors are likely to reward firms that demon-strate the agility to modify their DT strategies,viewing these firms as well-positioned to capitalize on digital growth opportunities.Second,the"trust enhancement mechanism"offers an additional expla-nation for the observed market response.When firms fulfill and exceed DT commitments,it signals a responsible,trustworthy management approach,valued in markets where firms often exaggerate DT inten-tions to attract subsidies or manipulate stock performance.Exceeding DT promises counteracts investor skepticism around overstated disclo-sures,enhancing investor trust in the firm's leadership.In an era where impression management is common,actions that substantiate initial promises are perceived as signs of integrity,making these firms more attractive to investors.By moving beyond rhetorical disclosures,these firms establish a robust,trustworthy market presence,reflecting respon-sible and transparent management practices that foster investor loyalty and positively influence stock performance.Our analysis further reveals that the market response to DT decoupling is not uniform but varies based on the external support conditions and the internal characteristics of the firms.Firms located in regions or pe-riods with concentrated policy support for digital initiatives experience stronger positive reactions to DT"action over words".For example,firms operating in regions that actively promote digital transformation through supportive policies or incentives demonstrate higher investor confidence when exceeding initial DT projections.Similarly,periods marked by major policy milestones,such as the 19th Party Congress that emphasized building a"digital China",amplify the market's positive response to firms exhibiting DT decoupling.This effect is more muted in firms with high debt levels or limited managerial expertise in IT,suggesting that financial health and digital competency play a role in investor perceptions of DT efforts.This study contributes to the literature in multiple ways.First,it extends the decoupling concept beyond CSR research by applying it to DT activ-ities,illuminating how DT"action over words"impacts market percep-tion and drives investor behavior.Unlike prior studies that examine DT disclosures and investment outcomes independently,our approach in-tegrates these elements,demonstrating how the alignment between DT disclosures and actions serves as a strategic market signal.This perspec-tive not only broadens the scope of DT research but also highlights the value of synchronization between words and actions,offering a nuanced understanding of the impact of decoupling in digital contexts.Secondly,this study addresses an important aspect of DT information disclosure by exploring the economic consequences of misalignment between stated intentions and actual actions.The findings suggest that firms overstating DT disclosures without corresponding investments risk damaging investor trust,while those aligning or exceeding their initial promises reinforce their market credibility.This insight has significant implications for governance,stressing the importance of transparency in DT disclosures to maintain investor confidence.By sys-tematically measuring DT decoupling,this study provides empirical ev-idence that substantiates the value of transparency in digital disclosures,reinforcing the need for firms to balance ambition with accountability.Finally,this paper offers practical insights for policymakers aiming to enhance the role of DT initiatives in supporting economic growth.As China's government continues to champion digital transformation across industries,our findings underscore the importance of establishing envi-ronments conducive to synchronizing DT actions with disclosures.Pol-icymakers should prioritize strengthening regional DT ecosystems,par-ticularly in developing areas,to incentivize firms to pursue substantive DT investments.Additionally,creating robust regulatory frameworks that encourage transparency in DT disclosures can enable investors to make better-informed decisions,ultimately fostering a more resilient digital economy.In practical terms,the implications of this study extend to both firms and regulatory bodies.First,to enhance the effectiveness of DT initia-tives,government agencies must expand the scope and scale of DT sup-port policies,ensuring that financial resources flow efficiently to areas where they can drive real digital progress.Second,given the heteroge-neous market response to DT decoupling,support mechanisms should be tailored based on firms'financial conditions and digital capabilities,allowing policymakers to more precisely align support with firm needs.This tailored approach enables regulators to maximize the impact of DT policies on economic growth and resource allocation.Lastly,firms must leverage advanced information-sharing technologies to reduce infor-mation asymmetries,fostering transparency and enabling investors to assess DT initiatives with greater accuracy.In conclusion,this paper demonstrates that"action over words"in DT serves as a significant market signal,with firms that fulfill and surpass DT promises benefiting from heightened investor confidence and trust.As China continues to advance its digital economy agenda,fostering an en-vironment where DT disclosures are met with corresponding actions will be essential for sustainable growth.This alignment not only drives capital allocation efficiency but also strengthens the digital transformation land-scape,paving the way for long-term economic resilience and innovation.
Digital TransformationMarket ReactionsDecouplingManagement Discussion and AnalysisForward-looking Informa-tion Disclosures
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