Enterprise digital transformation and return comovement of business groups

Abstract

This paper investigates the impact of enterprise digital transformation on the capital market information efficiency. Specifically, we explore the effects of digital transformations on the comovement of stock prices between firms and their affiliated business group entities. Our results underscore a significant reduction in price-based return comovement for firms within the same business groups after digital transformation, indicating an improvement in information efficiency of capital market. Our findings exhibit more pronounced pattern among firms with higher level of diversification, those experiencing higher performance volatility, stronger financing constraints, and higher information asymmetry. The potential mechanism is associated with the enhancement of firms' resilience against adverse shocks and firms' access to external financing, thereby decreasing firms' dependence on the internal capital market of business groups.