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Project Management

Corporate Digital Transformation and Operating Risk

  • Introduction

The digital economy has become a fundamental element of the modern world, representing a substantial portion of the Gross Domestic Product (GDP), particularly in developed nations like the US, where it experienced significant growth between 2005 and 2019. This economic paradigm is characterized by its reliance on data and information as essential factors of production, with digital technology serving as the primary driving force. This integration fosters the comprehensive incorporation of digital technologies into the tangible economy, continuously enhancing the digitalization, connectivity, and intelligence of both the economy and society, thereby accelerating the transformation of economic development and governance models. Consequently, the digital economy encompasses not only the digital endeavors of traditional industries but also the expansion of the digital technology sector, the establishment of digital infrastructure, and the regulation of digital markets (Carlsson, 2004).

Enterprises function as crucial agents in microeconomic dynamics. Corporate Digital Transformation (CDT) constitutes the fundamental unit and micro-level impetus behind the advancement of the digital economy. CDT involves leveraging digital technologies, including cloud computing, big data, artificial intelligence (AI), and the Internet of Things (IoT), to refine and revamp business processes, operational frameworks, organizational structures, products, and services (Du et al., 2024; Jiang et al., 2025a). The burgeoning digital economy cultivates a favorable digital ecosystem, marked by robust infrastructure, abundant technological resources, and vibrant digital markets, which collectively provide the technical support, market opportunities, and innovation stimuli crucial for CDT (Jiang et al., 2025a). Beyond altering internal operations, CDT influences both upstream and downstream components of supply chains and the broader ecosystem, promoting a digitally collaborative evolution across the entire industrial spectrum. This shift not only elevates societal digital literacy and overall digitalization levels but also cultivates the necessary talent and market infrastructure for the digital economy’s expansion. In this context, CDT has become an indispensable strategy for enterprises striving to enhance their efficiency, innovative capacity, and competitive edge, while aligning with the market demands and evolutionary trends of the digital era (Annarelli et al., 2021; Du et al., 2024; Liu et al., 2023a).

This literature review aims to summarize, synthesize, and evaluate the existing body of research concerning the relationship between Corporate Digital Transformation (CDT) and operating risk. The review will highlight the main themes that emerge across different studies, identify points of agreement and debate within the research, pinpoint existing gaps in our understanding, discuss the relevant methodologies employed by researchers in this field, and examine any discernible development in the field over time, as informed by the provided source. Furthermore, it will offer critical insights into how this body of work aligns or diverges in its contextual understanding.

  • The Landscape of Corporate Digital Transformation Research

The academic understanding of Corporate Digital Transformation has evolved considerably over time. Initially, the focus was primarily on investments in Information and Communication Technology (ICT), which are defined as systems used for transmitting, storing, processing, displaying, creating, and automating information dissemination, encompassing technologies like television, phones, radio, satellites, and computer hardware and software (Du and Jiang, 2022). This evolved into a broader concept of digitization, which involves enhancing business processes through digital technologies, and ultimately to digital transformation, which entails strategic overhauls of business models and organizational cultures, building upon the foundations laid by ICT and digitization (Verhoef et al., 2021). Verhoef et al. (2021) delineate these three stages of DT as the conversion of analog signals to digital formats (ICT investment), the enhancement of business processes via digital technologies (digitization), and the strategic re-evaluation of business models and organizational cultures (digital transformation). Vial (2019) posits that DT represents the convergence of the tangible and technological realms, profoundly altering the functionality and characteristics of the tangible. Baskerville et al. (2020) describe digitization as a result of the convergence of digital tools such as 5G, sensors, 3D printing, and blockchain, stemming from ICT advancements and integrating the digital and physical worlds.

Existing research has extensively explored the numerous benefits of CDT. Studies have widely documented enhancements in financial performance (e.g., Zhai et al., 2022; Liu et al., 2023a; Liu et al., 2023b; Peng and Tao, 2022; Babina et al., 2024; Chen and Srinivasan, 2024), productivity (e.g., Du and Jiang, 2022; Guo et al., 2023), innovation capabilities (e.g., Zhuo and Chen, 2023; Rubio-Andrés et al., 2024; Wu and Li, 2024), environmental outcomes (e.g., Shang et al., 2023; Bendig et al., 2023; Zhou et al., 2023), and external financing (e.g., Sun et al., 2024; Jiang et al., 2025a), among other economic advantages like improved supply chain relationships (Geng et al., 2024; Dubey et al., 2024) and cost management (Du et al., 2024; Li et al., 2024). For instance, Babina et al. (2024) found that American companies making significant investments in AI technology tend to experience enhanced growth, larger employment scales, and increased corporate value. Du et al. (2024) demonstrated that digital technology-driven innovations can increase operational flexibility and reduce cost stickiness. Through textual analysis, Chen and Srinivasan (2024) empirically established a positive correlation between the frequency of digital-related keywords in corporate reporting and elevated corporate value. Zhou et al. (2023), focusing on Chinese firms, found that company digitization leads to significant improvements in environmental public sentiment. Jiang et al. (2025a) identified an enhancement in external financing capabilities linked to increased corporate digital awareness, reflected by improved bond credit ratings.

However, a contrasting perspective exists, highlighting that digital transformation is not a panacea and may not align with the strategic needs of every enterprise. Challenges such as technological fit, business model synchronization, management effectiveness, and liquidity constraints can impede successful DT (Dewan and Ren, 2011; Oludapo et al., 2024), occasionally leading to failure (Oludapo et al., 2024; Kempeneer and Heylen, 2023; Sun et al., 2024). Moreover, the literature points to potential drawbacks of DT, including diminished innovation efficiency (Usai et al., 2021), profitability (Guo et al., 2023), and external financing capabilities (Sun et al., 2024). Oludapo et al. (2024) and Kempeneer and Heylen (2023) argue that rapid or extensive DT, despite its potential benefits, can lead to significant resource displacement effects. Sun et al. (2024) suggest that an accelerated pace of digitization could exacerbate a company’s financial constraints. Usai et al. (2021) observed a minimal impact of commonly implemented digital technologies on corporate innovation performance in European Union companies, suggesting that innovation relies more on creativity and sustained R&D than mere technological adoption. Guo et al. (2023) found that while DT indicators may increase a company’s total factor productivity (TFP), they might concurrently lower other performance metrics. This underscores the potential for the paradox of "too much of a good thing" in DT.

III. Corporate Digital Transformation and Corporate Risk: Existing Research

Given the ambiguous relationship between DT and economic outcomes, the risk effects associated with digitization have become a crucial area of inquiry. Recent studies have explored the complex interplay between corporate digitization and various forms of risk. Regarding financial risk, research by Chen et al. (2024a) indicates that CDT substantially alleviates firms’ default risk, thereby enhancing financial stability. In the realm of market risk, empirical analyses suggest that CDT significantly curtails the risk of stock price crashes (Jiang et al., 2022) and systemic risks (Jiang et al., 2024), potentially by enhancing firms’ ability to counteract information asymmetry during market volatility. Concerning governance risk, Xu et al. (2024) discovered that the effectiveness of CDT on enterprise risk management is contingent upon a firm’s governance capabilities, with board-level IT governance having a negative moderating influence. Luo (2021) examines governance risks specific to multinational enterprises, emphasizing the critical role of geographic diversity and international strategic planning in managing information security and regulatory challenges related to cross-border data flows. Regarding supply chain risk, Ivanov et al. (2019) developed a framework to analyze how Industry 4.0 technologies mitigate risks associated with supply chain disruptions. Chen et al. (2025) focus on the spillover effects of delayed digitization within supply chains, noting that such delays can escalate financial risks for suppliers and intensify revenue volatility.

Some research also discusses the risk-bearing capacity of companies following digitization (Liu and Liu, 2024; Luo et al., 2024; Wu and Wang, 2024; Feng and Yu, 2025). For example, Luo et al. (2024) observed that CDT in A-share listed companies correlates with an increase in firms’ propensity for risk-taking, potentially due to enhanced capabilities to identify and exploit new market opportunities. Other research using textual indicators of digitization also confirms that CDT raises risk-taking levels.

  • Gaps in the Literature and Motivation for Further Research on Operating Risk

Despite significant advancements in examining the linkages between DT and corporate risk, several areas remain underexplored. First, while there is considerable discussion on firms’ increased propensity to assume risk post-digitization, there is limited research addressing operational risks and the valuation of real options following digitalization. Second, while existing studies extensively assess the impact of digitalization on key financial metrics, there is a notable deficiency in the exploration of non-operational financial conditions. Moreover, as sustainable growth and ESG performance gain importance, these aspects demand further scholarly attention. Third, although the advantages of corporate digitalization are frequently highlighted, it is equally important to acknowledge the potential for DT failure and the significant strains imposed by a too-rapid digital transition. Fourth, the prevalent use of textual indicators to gauge digitalization levels, while indicative of executive awareness, may not accurately capture the actual economic impact.

The current study, from which these excerpts are drawn, seeks to bridge these scholarly voids by primarily focusing on the influence of CDT on firms’ operational risks, which are crucial for sustaining corporate operations and securing competitive advantage. Operational risks reflect not only the competitiveness and market presence of a company’s products but also the compliance and effectiveness of its internal management. This research endeavors to provide a multidimensional theoretical analysis, mechanism elucidation, and heterogeneity investigation, furnishing pivotal insights for a comprehensive understanding of CDT’s economic benefits, enhancing corporate risk management, boosting market competitiveness, and reinforcing adaptability in the digital age. It challenges the norm of using revenue volatility as a sole risk metric by examining the directional volatility of revenue and changes in real options value. Furthermore, it broadens the analytical framework by highlighting the costs and uncertainties associated with DT and how it may exacerbate operating risks, empirically demonstrating the potential for a "too much of a good thing" scenario. The study also expands the dialogue beyond primary financial variables to include off-balance-sheet financial conditions and non-financial performance, illustrating how CDT can mitigate operating risks through both financial and non-financial channels. Finally, it introduces a novel digitalization index based on asset conditions to analyze its influence on operational risks, aiming to provide a more accurate measure of a firm’s investment behavior in DT.

  • Relevant Methodologies Employed in the Field

A common methodological approach in existing literature involves constructing digitalization indices based on text frequency analysis of corporate reports. For instance, the frequency of digital-related keywords in management discussion and analysis (MD&A) sections has been used to gauge executive awareness and link digitalization to firm value, environmental sentiment, and risk-taking (e.g., Feng and Yu, 2025; Liu and Liu, 2024; Wu and Wang, 2024; Jiang et al., 2024; Sun et al., 2024). However, the current study introduces a notable methodological contribution by employing indicators based on changes in digital intangible assets. This asset-based metric is argued to be a more precise quantification of CDT investments, enhancing accuracy by circumventing the prevalent measurement biases associated with traditional word frequency methods, which often suffer from noise in corporate disclosures (Bendig et al., 2023; Chen and Srinivasan, 2024).

The methodology for constructing the CDT indicator involves several steps. First, an initial keyword dictionary focused on digital technologies (e.g., “cloud computing,” “big data,” “artificial intelligence,” “Internet of Things,” “blockchain”) was manually created based on literature and industry reports. Subsequently, a deep learning model (RoBERTa-wwm-ext) was trained on an extensive Chinese corpus to refine and expand this list. These refined keywords were then used to analyze the intangible asset disclosures of listed companies. Assets mentioned in conjunction with these keywords (e.g., “cloud computing platform development,” “big data analytics software”) were classified as “digital assets”. The primary CDT indicator is defined as the ratio of the increase in digital assets to the total intangible assets, effectively quantifying the relative significance of digital assets within the total intangible asset portfolio during the digital transformation process. The study also employs alternative indicators, such as the ratio of the increase in digital intangible assets to total assets (CDT2) and the ratio of the increase in digital fixed assets to total fixed assets (CDT3), for robustness checks. This asset-based approach is highlighted for its ability to reflect the dynamic valuation of digital assets, control for firm size and temporal trends, and adapt to disruptions in digital transformation, offering an improvement over the static nature of word frequency analysis.

In terms of analytical methods, the study employs regression analysis to examine the impact of CDT on operating risk, controlling for various firm-level characteristics, industry-fixed effects, and year-fixed effects. To address potential endogeneity concerns, the study utilizes instrumental variable regressions, employing executives’ awareness of DT as an instrument. Heckman two-step models and propensity score matching (PSM) are used to mitigate potential self-selection bias. Additionally, placebo tests are conducted to ensure the results are not driven by unobservable factors. Finally, the study employs double machine learning methods to complement OLS estimations and better capture how covariates influence outcome variables.

  • Development in the Field Over Time (if applicable based on the source)

Based on the provided source, we can infer a certain development in the field of CDT research. Initially, the focus was on understanding the adoption and implementation of ICT, which represented the early stages of technological integration in businesses. Over time, the research evolved to encompass the broader concept of digitization, examining how digital technologies were being used to improve existing business processes. More recently, the field has shifted towards the more strategic and holistic view of digital transformation, focusing on the fundamental changes in business models and organizational cultures driven by digital technologies.

Parallel to this conceptual evolution, the research has also seen a progression in understanding the outcomes of CDT. Early studies focused on identifying the various benefits, such as improved financial performance, productivity, and innovation. As the field matured, researchers began to explore the potential drawbacks and challenges associated with DT, acknowledging that it is not always a straightforward path to success and can even lead to negative consequences. More recently, there has been an increasing interest in understanding the risk implications of CDT, moving beyond the initial focus on benefits to examine how digitalization affects different types of corporate risk, including financial, market, governance, and supply chain risks.

Furthermore, the methodologies used in the field have also developed. Early studies often relied on more general measures of IT adoption or textual analysis of company reports to proxy for digitalization. The current study's introduction of an asset-based measure of CDT signifies a move towards more sophisticated and economically grounded approaches to quantifying digital transformation. The increasing application of advanced econometric techniques and machine learning methods also reflects a desire for more rigorous and nuanced analyses of the complex relationships involved.

VII. Critical Insights and Contextual Alignment/Divergence

The existing body of research on CDT, as reflected in the provided source, shows a general agreement on the transformative potential of digital technologies for businesses. There is a broad consensus that CDT can drive numerous benefits across various aspects of firm performance and operations. Furthermore, there is a growing recognition that CDT has significant implications for different dimensions of corporate risk.

However, the literature also reveals points of divergence and debate. One key area of contention is whether the outcomes of CDT are universally positive. While many studies highlight the benefits, others emphasize the potential for drawbacks, challenges, and even failures associated with digital transformation. This suggests that the relationship between CDT and firm performance (and risk) is more complex and contingent on various factors. Another point of debate lies in the most effective ways to measure CDT. While textual analysis has been a common approach, the current study argues for the superiority of asset-based measures in capturing actual investment behavior and economic impact. Additionally, there are differing views on the relationship between CDT and risk-taking. Some research suggests that digitalization increases a firm's appetite for risk, while the study from which the excerpts are drawn focuses on how CDT can mitigate operating risk, which represents a more passive form of risk exposure.

The contextual nuances are particularly important when considering the study's focus on Chinese mainland. The source explicitly highlights several factors unique to this context that influence CDT and its effects, including the strong role of government policies in promoting digitalization and developing digital infrastructure, the rapid and dynamic nature of DT in Chinese enterprises, the potential for irrational digital investment due to policy support, and the specific market demands and technological applications developed within China. The emphasis on the role of information infrastructure, intellectual property protection, and digital taxation in enhancing the effectiveness of CDT is also particularly relevant to the Chinese context. These contextual factors suggest that findings from studies conducted in other regions may not be directly applicable to Chinese firms without careful consideration of these unique conditions. For instance, the prevalence of excessive digital investment in China, potentially driven by government intervention, might lead to different risk implications compared to more market-driven economies.

VIII. Conclusion

The literature on Corporate Digital Transformation presents a multifaceted view of its impact on businesses. While there is widespread agreement on the potential of CDT to enhance various aspects of corporate performance, a growing body of research also acknowledges the challenges, drawbacks, and risks associated with it. The field has seen a development in both its conceptual understanding of DT and the methodologies used to study it, with a recent move towards more nuanced and economically grounded measures of digitalization.

The study from which these excerpts are drawn contributes significantly to this body of work by specifically focusing on the underexplored relationship between CDT and operating risk. It introduces a novel asset-based measure of CDT and provides empirical evidence, primarily from Chinese firms, suggesting an inverse relationship between CDT and revenue volatility, indicating a mitigation of operating risk. Furthermore, the study delves into the mechanisms through which this risk reduction occurs, highlighting both financial and non-financial channels, and examines the moderating effects of firm characteristics and regional attributes. Notably, it also explores the potential downsides of excessive digital investment, suggesting a non-linear relationship with operating risk. By addressing the identified gaps in the literature and providing a context-specific analysis for Chinese mainland, this research offers valuable insights into the complex interplay between digital transformation and corporate risk management in the digital era.

FAQ

  • How is corporate digital transformation (CDT) defined in this study, and why is it considered important for enterprises?

This study defines corporate digital transformation (CDT) as the process where enterprises leverage digital technologies such as cloud computing, big data, artificial intelligence, and the Internet of Things to refine and revamp their business processes, operational frameworks, organizational structures, products, and services. CDT is considered indispensable for enterprises as it enhances efficiency, innovative capacity, and competitive edge, allowing them to align with the market exigencies and evolutionary trends of the digital era. It not only transforms internal operations but also influences supply chains and the broader ecosystem, contributing to societal digital literacy and the overall digitalization level.

  • What is the primary relationship that this study reveals between corporate digital transformation (CDT) and revenue volatility (as a measure of operating risk)?

The study's overall finding reveals an inverse relationship between CDT and revenue volatility, suggesting that as companies increase their digital transformation efforts (measured by the ratio of added value of digital assets to total intangible assets), their revenue volatility tends to decrease. This indicates that CDT generally helps in mitigating operating risks. This relationship holds even after employing various techniques to address potential endogeneity issues.

  • According to the research, what are some potential negative consequences or risks associated with corporate digital transformation (CDT)?

While CDT generally reduces operating risk, the study highlights potential downsides. Firstly, excessive digital investments can exacerbate operating risks and might compromise cash flow availability, suggesting a "too much of a good thing" dilemma. Secondly, rapid or extensive DT can lead to significant resource displacement effects and financial constraints. Finally, the study acknowledges that DT is not a universal solution and can fail due to challenges like technological fit, business model synchronization, management effectiveness, and liquidity constraints.

  • How does this study measure corporate digital transformation (CDT) differently from previous research, and what are the advantages of this approach?

Unlike previous studies that often rely on textual analysis of company reports to create digitalization indices, this study uses indicators based on changes in digital intangible assets (the ratio of the increase in digital assets to total intangible assets). This asset-based metric is argued to be more accurate as it reflects a firm's actual investment behavior in DT, avoiding the noise inherent in word frequency counts. It also captures the dynamic valuation of digital assets, controls for firm size and temporal trends, and can adapt to disruptions in DT. Furthermore, this approach has broader applicability beyond Chinese listed companies and encompasses a wider array of digital asset types than indicators based solely on capital investments.

  • What are the two main channels (financial and non-financial) through which the study finds that corporate digital transformation (CDT) mitigates operating risks?

The study identifies two main channels: Financial Channel: CDT enhances firms' profitability and resilience by improving cost management, pricing strategies, and market adaptability. It increases gross margins, reduces customer concentration (indicating enhanced market competitiveness), and steers companies away from excessive financialization (allocation of resources to financial assets rather than core business), thereby reducing non-business operating risks. Non-financial Channel: CDT improves corporate governance (by enhancing internal control systems and reducing agency costs) and ESG performance (environmental, social, and governance). This, in turn, helps companies build a solid reputation and strengthens their risk management mechanisms.

  • Does the study suggest that all types of firms benefit equally from corporate digital transformation (CDT) in terms of risk reduction? If not, which types of firms benefit the most?

No, the study's heterogeneity analysis reveals that the effect of CDT on operating risks varies across firms with different characteristics. Smaller firms, those with high capital intensity, and those with high agency costs are found to benefit the most from CDT in terms of operating risk reduction. This is attributed to smaller firms gaining disproportionately in competitiveness and efficiency, highly capital-intensive firms improving resource adjustment abilities, and firms with high agency costs benefiting more from enhanced governance and transparency brought by digitalization.

  • The study explores the idea of "too much of a good thing" in relation to corporate digital transformation (CDT). What does this refer to, and what kind of relationship does the study find between the level of CDT and operating risks?

The concept of "too much of a good thing" in this context refers to the possibility that while some level of digital transformation is beneficial for reducing operating risks, excessive or too rapid digital investment can lead to negative consequences. Specifically, the study finds a nonlinear U-shaped relationship between CDT and firm operating risks. This suggests that initially, increasing CDT reduces operating risks. However, after a certain threshold, further increases in CDT may start to increase operating risks, potentially due to the strain on cash flows from over-investment in digital assets.

  • According to the study, does the reduction in operating risk associated with corporate digital transformation (CDT) come at the cost of hindering a company's potential for enhanced performance?

No, the study finds that the reduction in operating risk associated with CDT does not sacrifice the potential for enhanced company performance. In fact, the analysis indicates that CDT appears to augment the value of real options, meaning it increases a company's upside potential for performance. This suggests that by reducing operational uncertainties, CDT allows firms to more effectively explore and capitalize on growth opportunities without necessarily increasing downside risks

(Jiang et al., 2025)

Reference:

Jiang, K., Chen, L., Li, J., & Du, X. (2025). The risk effects of corporate digitalization: exacerbate or mitigate? Humanities and Social Sciences Communications, 12(1). https://doi.org/10.1057/s41599-025-04628-y