Digital innovation and supply chain risk: A large language model-based analysis

We construct a firm-level supply chain risk measure using a novel approach based on large language models (LLMs) and explore whether digital innovation impacts this risk. Our findings reveal that firms with higher levels of digital innovation exhibit significantly lower supply chain risk exposure. These results are robust and remain significant after controlling for endogeneity issues. Moreover, the mitigating effect of digital innovation is particularly pronounced in firms with greater geographical supply chain distances, higher operational complexity, extensive overseas operations, short-term relationships with partners, and those in the manufacturing sector. We further demonstrate that digital innovation enhances information sharing and improves operational efficiency, serving as potential mechanisms for supply chain risk reduction. Overall, our results emphasize the significant role of digital innovation in enhancing supply chain resilience and contribute to the expanding literature on applying LLMs in finance.