The impact of digitalization on operational risk: An organizational information processing perspective

Abstract

Digitalization has emerged as a mitigation tool for business risks. However, digitalization has not been effectively utilized because the mechanism of digitalization mitigating risks is still in the dark box. Drawing upon organizational information processing theory, we propose that digitalization reduces operational risk through internal control systems and supply chain networks (SCN). Based on the data of Chinese public firms from 2010 to 2019, we confirm that both improving internal control system quality and reducing SCN centrality are effective vehicles to help digitalization combat operational risk. Specifically, a high degree of digitalization leads to high-quality internal control systems, which, in turn, leads to low operational risk. Inversely, digitalization increases SCN centrality, which, in turn, leads to high operational risk. Furthermore, the positive mediation effect of SCN centrality is significantly more substantial than the negative mediation effect of internal control system quality. Subsequent moderating effect analysis shows that diversification does not impact the mediation effect of internal control system quality but strengthens the mediation effect of SCN centrality. This study deepens the understanding of the risk mitigation effect of digitalization and offers meaningful metrics for managers to prevent firms from suffering unexpected risks.