Effects of Digital Transformation on Dynamic Capital Structure Adjustment: Evidence from China

Abstract

Over the past two decades, there has been a surge in digital innovation. China is the world’s second-largest digital economy entity and the national strategy to build a digital China is in full swing. Chinese enterprises have received great support while pursuing digital transformation. This study aims to explore the impact of digital transformation on firm dynamic capital structure adjustment by taking evidence from Chinese listed firms. Based on the data of 3855 Chinese A-share listed firm-year observations during 2011–2021, this study employed a panel data fixed effects model to ascertain the association between the proposed variables. The results indicate that digital transformation has a significant positive effect on accelerating capital structure adjustment speed. Furthermore, we show that digital transformation promotes dynamic capital structure adjustment through financial flexibility. The impact of digital transformation on dynamic capital structure adjustment is characterized by heterogeneity in the ownership type, asset size, and credit cycle. In addition, reduced financing constraints and growing economic policy uncertainty will moderate the relationship between digital transformation and dynamic capital structure adjustment. Our findings provide insights into how digital transformation is driving companies to accelerate their capital structure adjustment speed to the optimal, and supplements the existing literature on the determinants of dynamic capital structure adjustment.