Digital transformation and the cost of capital

This study examines the impact of digital transformation on the cost of capital using data from A-share listed firms in China's Shanghai and Shenzhen stock exchanges from 2010 to 2023. We use textual analysis to measure digital transformation and find that digital transformation significantly reduces the cost of capital. This conclusion remains valid after robustness and endogeneity tests. Furthermore, the results indicate that digital transformation can reduce the cost of capital by enhancing information transparency, reducing analyst forecast dispersion, and improving investor confidence. We further explore heterogeneity in this relationship and find that the reduction in the cost of capital via digital transformation is more pronounced in magnitude for large firms, firms in the eastern region, modern service firms, and in periods of high economic policy uncertainty. The findings have implications for corporate strategic planning and implementation in the digital era from the perspectives of both firms and the government.