Digital transformation and corporate diversification: Evidence from China's A-share listed companies

Abstract

Digital transformation, defined as the application of digital technologies, is profoundly reshaping business operations. However, its impact on corporate diversification (i.e., a firm's expansion into new industries or product markets) remains underexplored. In this study, we develop a theoretical model and empirically test it using data from China's A-share listed companies. Our findings indicate that digital transformation significantly promotes corporate diversification by reducing transaction costs, alleviating financing constraints, and fostering digital technological innovation. This effect is especially pronounced in nonstate-owned enterprises, labor-intensive industries, competitive sectors, and firms located in regions with advanced digital infrastructure and higher levels of economic development. Additionally, digital transformation enhances firms' market power, improves operational performance, and increases production efficiency, further reinforcing its strategic value. These findings contribute to the literature by revealing the mechanisms through which digitalization influences corporate strategy and offer policy implications for local governments aiming to strengthen digital infrastructure and support business digitalization efforts.